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Homework answers / question archive / The relationship between financial leverage and profitability Pelican? Paper, Inc
The relationship between financial leverage and profitability
Pelican? Paper, Inc., and Timberland? Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow :
Item Pelican Paper, Inc. Timberland Forest, Inc.
Total assets $10,800,000 $10,800,000
Total equity (all common) 9,400,000 6,200,000
Total debt 1,400,000 4,600,000
Annual interest 140,000 460,000
Total sales 23,000,000 23,000,000
EBIT 5,750,000 5,750,000
Earnings available for
common stockholders 3,394,800 3,174,000
. Use them in a ratio analysis that compares the? firms' financial leverage and profitability.
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
c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican? Paper? What are the risks that? Timberland's investors undertake when they choose to purchase its stock instead of? Pelican's?
Please work out the solution and add how you got that solution. I have needed help on this for awhile and the last time I posted this question, the answers were wrong. Please help me, I appreciate it. Thanks!
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