Rate of return
Not what you're looking for?
Laurel company has assets of $2 million and long-term, 10% debt of $1,200,000. Hardy Company has assets of $2 million and no long-term debt. The annual operating income (before interest) of both companies is $400,000. Ignore taxes.
1. Compute the rate of return on
a. assets
b. stockholder equity.
2. Evaluate the relative merits of each base for appraising operating management.
Purchase this Solution
Solution Summary
The solution explains the calculation of rate of return on assets and equity and the relative merits of each base
Solution Preview
1a. Return on Assets = (Net Income + Interest X (1-tax rate)/Total Assets
If we ignore taxes, then Net Income + Interest = Operating Income
Return on Assets = Operating Income/Assets
Since both companies have the same assets of $2 million and operating income of $400,000
Return on Assets for both = 400,000/2,000,000 = 20%
b. Return on Equity = Net Income/Total Equity
Laurel Company
Operating Income = 400,000
Interest = 1,200,000 X 10% = 120,000
Net Income = 280,000
Total Assets = 2,000,000 (Debt + Equity)
Debt financing = 1,200,000
Equity financing = ...
Purchase this Solution
Free BrainMass Quizzes
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Cost Concepts: Analyzing Costs in Managerial Accounting
This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.
Accounting: Statement of Cash flows
This quiz tests your knowledge of the components of the statements of cash flows and the methods used to determine cash flows.
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Production and cost theory
Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.