3.Shari’s Gift Store had the following events occur. Assume that immediately after each independent event, new financial statements were prepared. Indicate how each event would affect the company's financial leverage, current ratio, and debt to equity ratio. In the space provided, indicate an increase with I, a decrease with D, and no effect with X.
Financial
LeverageCurrent
RatioDebt to
Equity Ratio
a.Treasury stock is sold for cash___________________________
b.Goods are sold on credit to customers at less than cost
_________
_________
_________
c.Bonds payable (long-term debt) are paid off before their maturity date
_________
_________
_________
d.Cash dividends are declared and paid to shareholders
_________
_________
_________
e.New equipment is purchased on a 5-year note payable
_________
_________
_________
4.Levin Lumber Co. reported the following selected financial information:
Total assets$2,000
Total liabilities500
Retained earnings1,000
Sales3,600
Net income900
Required:
a.Compute return on assets.
b.Compute return on equity.
c.Explain the role of financial leverage in the results of parts (a) and (b).