13.The following summarized balance sheet information is available at December 31, 2007
Alana Co.Eva Company
Current assets$22,000$20,500
Long-term assets28,00029,500
Current liabilities6,0005,000
Long-term liabilities5,00029,000
Common stock, $10 par25,00015,500
Retained earnings14,000500
During the year, operating income for both was $7,500. Alana's interest expense was $750 and Eva's was $4,350. Both companies were subject to a 35% 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.
14.Selected information from the annual reports of Rhino Company and Bengal Company is given below:
RhinoBengal
Total assets$50,000$60,000
Current liabilities25,00018,000
Long-term debt017,000
Common stock10,00010,000
Retained earnings15,00015,000
Sales40,00050,000
Net income12,50015,000
Required:
a.For each company above, compute (1) return on assets, (2) return on equity, and (3) debt to equity.
b.Evaluate the financing decisions of each company and discuss how these decisions have affected returns to common stockholders.