11.The Montana Company reported the following information:
Total assets$600,000
Total liabilities360,000
Net income48,000
Required:
a.Compute return on assets and return on equity.
b.Explain the difference between the two ratios.
12.Assume the following summarized balance sheet information at December 31, 2007:
Yellow CompanyRed Company
Current assets$10,000$11,000
Long-term assets15,00014,000
Current liabilities2,5004,500
Long-term liabilities12,5002,500
Common stock, $10 par8,00015,500
Retained earnings2,0002,500
During the year, operating income for both was $7,500. Yellow's interest expense was $1,250 and Red's was $250. Both companies were subject to a 40% income tax rate.
Required:
a.Describe how these two firms compare regarding use of leverage.
b.Is the firm with the higher degree of leverage using it effectively? Discuss. Show any supporting computations clearly and neatly.