3. Profitability ratios, trading on the equity
Digital Relay has both preferred and common stock outstanding. The company reported the following
information for 20X7:
Net sales $1,750,000
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,200,000
Average common stockholders’ equity 500,000
a. Compute the gross profit margin ratio, the return on equity and the return on assets, rounding
calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.
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