Chapter 2, Problem 22E

To determine

Concept Introduction

Return on assets: Return on Assets (ROA) is an accounting ratio that describes how profitable a company is with respect to its total assets. ROA explains how efficiently the management has utilized the business assets for generating earnings. ROA is calculated by dividing a company’s annual income by the average assets of the company. ROA is described in percentage terms.

Debt Ratio: Debt ratio is a financial ratio that calculates the leverage of the company. It is the ratio of the total debt to the total assets and is represented in percentage terms. The debt ratio explains the amount of debt on the balance sheet as compared to assets on the balance sheet. The higher the ratio, the higher is the risk associated with the company.

1.a.

To Compute: The Debt ratio and the return on assets ratio for the data given.

To determine

To find: The Company, whose business relies most heavily on creditor financing.

To determine

To find: The Company, whose business relies most heavily on equity financing.

To determine

To find: Two Companies with greatest risk based on debt ratio.

To determine

To find: Two Companies which earn the highest return on assets.

To determine

To find: The Company that the investors would most likely prefer based on the risk–return relation.