option #1: profitability analysis exercises and problems
Do the assigned problems using Summer Peebles, Inc.’s condensed 2014 financial data below:
Assets
Current Assets
$250,000.00
Noncurrent Assets
$1,750,000.00
Total Assets
$2,000,000.00
Liabilities and Equity
Current Liabilities
$200,000.00
Noncurrent Liabilities (8% Bonds)
$675,000.00
Common Stockholders’ Equity
$1,125,000.00
Total Liabilities and Equity
$2,000,000.00
Additional Information:
- Net income for 2014 is $157,500.
- Income tax rate is 50%.
- Amounts for total assets and shareholders’ equity are the same for 2013 and 2014.
- All assets and current liabilities are considered to be operating.
Required:
- Determine whether leverage (from long-term debt) benefits Rose’s shareholders. (Hint: Examine ROCE with and without leverage.)
- Compute the NOPAT and RNOA (use ending NOA).
- Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part (B).
Your submission should:
- Be 1-2 pages for the written portion.
- Include the Excel spreadsheet with computations.
- Clearly separate your responses so your instructor knows the problems you are answering.
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