(The effect of leverage on ROA and ROE, LO 2) Three companies, Company A, Company B, and Company C, are identical in every respect except for how they are financed. You are provided with the following information about each company.

Required:

a. Calculate ROA and ROE for each company for the years ended December 31, 2005 and 2006.

b. Explain the differences in performance among the three companies.

c. Explain the effect of leverage on the performance measures.

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Company A Company B Company C Jan. 1, Dec. 31, Dec. 31, 2005 2005 2006 2005 Jan. 1, Dec. 31, Dec. 31, 2005 2006 Jan. 1, Dec. 31, Dec. 31, 2005 2005 2006 Income before interest and taxes $ 28,000 $ 3,000 $ 28,000 $ 3,000 $ 28,000 $ 3,000 Interest expense 0 0 3,000 3,000 7,000 7,000 Income tax expense 6,160 660 5,500 0 4,620 (880) Net income 21,840 2,340 19,500 0 16,380 (3,120) Dividends paid 10,000 5,460 7,660 3,120 4,540 Total assets $100,000 111,840 108,720 $100,000 111,840 Shareholders' equity 100,000 111,840 108,720 Tax rate 0.22 0.22 70,000 81,840 0.22 108,720 78,720 0.22 $100,000 111,840 108,720 30,000 41,840 38,720 0.22 0.22