Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares their financial leverage and profitability.
Item
Pelican Paper, Inc.
Timberland Forest, Inc.
Total assets
$10,000,000
$10,000,000
Total equity (all common)
9,000,000
5,000,000
Total debt
1,000,000
5,000,000
Annual interest
100,000
500,000
Total sales
$25,000,000
$25,000,000
EBIT
6,250,000
6,250,000
Net income
3,690,000
3,450,000
a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other.
(1) Debt ratio
(2) Times interest earned ratio
b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other.
(1) Operating profit margin
(2) Net profit margin
(3) Return on total assets
(4) Return on common equity
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Answer:
(3) Return on total assets
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