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:

1. Determine whether leverage (from long-term debt) benefits Rose's shareholders. (Hint: Examine ROCE with and without leverage.)
2. Compute the NOPAT and RNOA (use ending NOA).
3. 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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