Financial Accounting: Liabilities & Equities

Question 1 (35 marks)Computer questionThis question is based on Computer illustration 10-1. All numbers are in thousands, as are the numbers in the financial statements in Computer illustration 10-1.

Paperboard Corporation Limited (PCL) is now considering the acquisition of €200,000 of additional timberlands. It will have to acquire €50,000 of additional machinery in order to harvest and process this resource. This machinery can only be used for this specific location. It is expected that the timber will generate income, less direct expenses, of €40,000 in the first year, before any depreciation or interest costs. This level of production will use up one-twentieth of the productive resource. Two alternatives are being considered to finance the acquisition:

Case A — Issuance of €250,000 of borrowings, a 7.5%, 20-year convertible bond, convertible at the investor’s option. The bonds would be sold for €255,000. Interest is paid semi-annually, on June 30 and December 31. Market analysts estimated that the bonds would have sold to yield 8%, had they been issued without the conversion privilege. It was not possible to value the conversion rights separately.

Case B — Issuance of 10,000 ordinary shares for €250,000, cash.

Requireda. (9 marks)

Assume that this planned transaction actually took place at the beginning of the 20X4 fiscal year (on January 1, 20X4). For Case A and Case B, prepare journal entries to record

1. The issuance of bonds or shares.

2. The acquisition of the timberlands and equipment.

3. The net sales.

4. Interest paid or dividends issued.

5. Depreciation expense.

6. Any additional income tax expense.

For simplicity, make the following assumptions:

All net sales are collected in cash and all expenses and dividends are paid in cash (except depreciation).

For Case B, assume that the same per-share dividend is declared. That is, subtract the amount of preference dividends from the total dividends declared in 20X4 to determine the amount of the per-share dividend to ordinary shareholders in 20X4, and record the additional dividend according to the new number of shares issued.

Prepare a separate entry for the additional income tax expense at the end of the fiscal period. Assume that accounting income is equal to taxable income, and all income tax is paid in cash at the end of the fiscal year. The marginal tax rate is 38%.

For convenience, straight-line amortization is used to amortize the bond discount or premium.

Round all calculations to the nearest (thousand) euro.

b. (10 marks)

For each case, restate the balance sheet and income statement for the results of the transactions and events journalized in part (a). Remember that retained earnings will change as a result of the entries that change sales, expenses, and dividends.

For each case, submit your revised amounts and calculations for

a. Cash

b. Machinery and equipment

c. Timber and timberlands

d. Borrowings (net)/bonds

e. Ordinary shares and ordinary stock conversion rights

f. Retained earnings

g. Net sales

h. Depreciation

i. Interest expense

j. Provision for income taxes

k. Net profit

l. Dividends (ordinary and preference)

c. (8 marks)

Using the revised balance sheet and income statement and other data from your journal entries, calculate the following ratios for Cases A and B:

a. Debt to equity

b. Debt to total assets

c. Times interest earned

d. Return on total assets, after taxes (use year-end assets in the denominator)

e. Return on ordinary equity (use year-end equity in the denominator)

f. EPS — basic

g. Cash flow from operations

h. Dividends paid

i. Net operating cash flow after dividends

Note:Exclude future income tax from debt totals.

d. (8 marks)

Comment on the results of your ratio analysis in part (c), both from the point of view of a current shareholder of PCL and from the perspective of a lender.

ProcedureBegin by completing part (a).

To complete parts (b), (c), and (d)

These steps are for parts (b), (c), and (d) only. Part (d) is to be answered in a word-processing document in step 9, based on the printout indicated.

1. Open the file FA3LXQ1.

2. Study the layout of the worksheet. It is a condensed version of the solution worksheet for Computer illustration 10-1. Rows 5 to 58 contain the balance sheet information for 20X4 and columns for you to restate the balance sheet for both Case A and Case B. Notice that the balance sheets for both Cases A and B are now identical to 20X4. You will be required to make changes to the Case A and B balance sheet columns based on your answers from part (a).

Rows 60 to 79 contain the income statement for 20X4 and columns for Cases A and B. Rows 81 to 92 contain the additional information required to determine the amount of dividends, in particular the per-share dividend for Case B. Notice that there is no statement of retained earnings and that the retained earnings figure in the balance sheet (row 56) is calculated based on prior years’ retained earnings, profit from row 79, and dividends declared from row 83.

Rows 95 to 111 contain the ratios for 20X4. In column B, the ratios for 20X4 are not based on the year 20X4 figures; they are the “status quo” figures to use for comparison in your commentary for part (d). Columns D and F have been left blank for you to enter the appropriate formulas to calculate the ratios for Cases A and B, using the information in the data table, as required in part (c).

Part (b)

3. In rows 14 to 79, post the journal entry amounts from your solution to part (a) to columns D and F to make the necessary changes to the balance sheet and income statement for Cases A and B. For Case B, any dividends issued on the new ordinary shares should be posted to cell F83. Also, the number of new ordinary shares issued should be added to cell F88. You can use columns C and E to reference to the number of your journal entry in part (a). If more than one entry affects an account, list all entries in columns C and E (for example, 1, 2, 3, 4) and the individual adjustments in columns D and F (for example, €50,000 + €17,000).

4. Save your completed worksheet. In your word-processing document, for part (b), copy and paste, for each of Case A and B, the balance of Cash (the range A14 to F14), Machinery and equipment (the range A24 to F24), Timber and timberlands (cells A30 to F30), Borrowings/Bonds (the range A47 to F47), Ordinary shares, Ordinary stock conversion rights, and Retained earnings (cells A54 to F56), Net sales (cells A67 to F67), Depreciation/amortization (cells A71 to F71), Interest expense (cells A73 and F73), Provision for income taxes and Profit (cells A78 to F79), and Dividends declared (cells A83 to F83).

5. Display the formulas for the data table. Copy and paste into your word-processing document your calculations for the balances in step 4. For example, for cash, paste the range A14 to F14, after hiding columns C and E. Close the file without saving.

Part (c)

6. Based on the revised figures for Cases A and B entered in the data table in steps 3 and 4, enter the formulas to calculate the ratios for Cases A and B in columns D and F of rows 98 to 103. Use year-end balances for the denominator of return on assets and return on ordinary equity. Note that the formula in row 100 (Times interest earned) should be based on income before taxes. Next, complete rows 105 to 107. In cells D105 and F105, revise the original 20X4 cash flow from operations of €107,979 for Case A and B transaction cash flows that affect operations only.

7. Save your completed worksheet. For required part (c) of your assignment, copy and paste the ratio analysis in the range A95 to F107 into a word-processing document.

8. Display the formulas for the ratio analysis and copy and paste the cells in the range D98 to F107 into your word-processing document. Close the file without saving.

Part (d)

9. Print a copy of the balance sheet (range A1 to F58), the income statement, and revised additional information and ratio analysis (A60 to F112) to use when preparing your comments in part (d). Type your response to part (d) in your word-processing document.

Question 2 (12 marks)Computer question

This question is a continuation of Computer Question 2 in Assignment 9. The information required to do this problem is in the data folder. The annual consolidated financial statements of Lafarge Canada Inc. for 20X7 have been pre-entered in the worksheet and are not reproduced here.

Requireda. (8 marks)

Compute the ratios that measure profitability for 20X7.

Note:Omit the ratio, “Return on gross assets.” Prepare return ratios on an after-tax basis only. The marginal income tax rate is 38% and there is €395 of interest on long-term debt. €395 is also total interest expense. Preference dividends are €9,846. Round ratios to one decimal point.

b. (4 marks)

Provide a commentary on the ratios calculated in (a). Refer to the assumed industry data in your computer file as a standard of reference. Be sure to comment on the effect that financial leverage has had on the return ratios.

Procedure1. Open the file FA3LXQ2.

2. Study the layout of the worksheet. Rows 4 to 63 contain the consolidated balance sheet and income statement for 20X7 with comparative figures for 20X6. Rows 65 to 73 are set up to calculate the profitability ratios necessary to satisfy part (a) of the question.

3. Enter the appropriate formulas to calculate the profitability ratios for 20X7 in cells B68 to B71. Use averages where appropriate.

4. Save your completed worksheet, and copy and paste in the range of A65 to B71 into a word-processing document.

5. Display the formulas in range A68 to B71, and copy and paste these into your word-processing document. Close up Column A so the formulas are large enough to be read.

6. Type your response to part (b) directly in your word-processing document.

Question 3 (17 marks)At the end of 20X5 the following information was available for Russo Corporation.

Amount

Borrowings: convertible debenture €287,000

The principal amount originally due was €300,000. A discount of €13,000 was originally recorded. Each €1,000 of Borrowings is convertible into 300 ordinary shares after the stock split. On December 1, 20X5, €100,000 of Borrowings is converted to ordinary shares. Interest was paid on the conversion date.Preference shares €0.50 cumulative €010,000 shares outstanding at the beginning of the year.Shares are convertible to ordinary shares on a 10 for 1 basis.All preference shares were converted on December 31.Ordinary shares conversion rights 17,500Ordinary shares €970,000Outstanding at February 1, 20X5 60,000Stock split was issued February 1, 20X5, that doubled the outstanding shares.On December 1, shares were issued on the borrowings conversion.On December 31, an additional 100,000 shares were issued on conversion of preference

shares.Retained earnings (after preference dividends declared) €570,000Profit from ordinary activities €86,000Includes interest expense €3,080 (including €10,800 to December 1 on convertible

bonds).Loss on expropriation (€12,400)Profit €73,600

Average income tax rate (30%)

RequiredShow how EPS would be disclosed in the financial statements. You need not prepare disclosure notes.

Source: Thomas Beechy and Joan Conrod, Intermediate Accounting, Vol. 2, First Edition (Toronto: McGraw-Hill Ryerson, 2000), Question E21-11, page 1210. Adapted with permission.

Question 4 (18 marks)

On December 31, 20X5, Falcon Ltd. had the following items on its balance sheet.

Amount€

Preference shares, Class A, €2.00 cumulative, redeemable (at €11.00) 500,00050,000 shares issued

Preference shares, Class B, €3.00 cumulative, redeemable(at €12.00), convertible 1,200,00080,000 shares issued, convertible at 1 preference share for 5 ordinary shares

Ordinary shares 5,357,000600,000 outstandingThe average ordinary share price during the period was €20.

Retained earnings (deficit) (2,394,000)

At December 31, 20X5, the following information was disclosed:

Ordinary share options outstanding

50,000 options outstanding that can be exercised after July 1, 20X12,at €15.00 per share

120,000 options outstanding that can be exercised after July 1, 20X17,at €17.00 per share

At December 31, 20X6, the following information was disclosed:

Profit was €1,100,000 before any preference dividends80,0000 ordinary shares were issued on March 1, 20X6, for €23 per shareTax rate (40%), and appropriate rate of return, before tax (12%)

No dividends were declared or paid to any of the shareholders

RequiredPrepare the earnings per share section of the financial statements for the year ended December 31, 20X6.

Source: Thomas Beechy and Joan Conrod, Intermediate Accounting, Vol. 2, First Edition (Toronto: McGraw-Hill Ryerson, 2000), Question P21-11, pages 1217 and 1218. Adapted with permission.

Question 5 (18 marks)20X5 20X6 20X7 20X8 20X9

Sales 600.0 620.0 650.0 640.0 690.0

Depreciation 5.0 5.0 5.0 5.0 5.0

Interest expense 10.0 11.0 11.2 12.0 10.5

Pre-tax profit 40.0 43.0 62.0 21.0 80.0

Income tax 15.0 17.0 22.0 6.0 30.0

Profit 25.0 26.0 40.0 15.0 50.0

Total assets 300.0 340.0 330.0 340.0 350.0

Accumulated depreciation (36.0) (31.0) (28.0) (22.0) (19.0)

Borrowings 100.0 110.0 170.0 165.0 190.0

Owners’ equity 150.0 160.0 170.0 165.0 190.0

Ordinary shares outstanding 4,000 4,000 4,000 3,900 3,800

Tax rate (40%)

RequiredCalculate the following ratios for the years 20X6, 20X7, 20X8, and 20X9:

a. Return on assets (after tax)b. Return on long-term capital (after tax)c. Return on ordinary shares

Suggested solutions

Question 1 (35 marks) Computer solutiona. (9 marks)

Case A — Issuance of convertible bonds PV of principal €250,000 (PV1, 4.0%, 40) (0.20829) € 52,073 PV of interest €9,375 (PVA, 4.0%, 40) (19.79277) 185,557

€ 237,630

Principal amount €250,000Present value of convertible bond 237,630 Discount on bonds payable € 12,370

Price received for convertible bond €255,000Present value of convertible bond 237,630 Ordinary stock conversion rights € 17,370

Journal entries1. Cash.............................................................................................. 255,000

Discount on bonds payable.......................................................... 12,370Bonds payable........................................................................ 250,000Ordinary stock conversion rights........................................... 17,370

2. Timberlands................................................................................. 200,000

Machinery.................................................................................... 50,000Cash........................................................................................ 250,000

3. Interest expense ........................................................................... 9,684Discount on bonds payable (€12,370/40).............................. 309Cash........................................................................................ 9,375

4. Cash.............................................................................................. 40,000Revenue.................................................................................. 40,000

5. Interest expense ........................................................................... 9,684Discount on bonds payable (€12,370/40).............................. 309Cash........................................................................................ 9,375

6. Depreciation expense................................................................... 12,500Timberlands (€200,000/20).................................................... 10,000Accumulated depreciation — machinery (€50,000/20)......... 2,500

7. Income tax expense...................................................................... 3,090Cash........................................................................................ 3,090

(€40,000 – €12,500 – €9,684 – €9,684) 0.38%

Case B — Issuance of ordinary shares

Journal entries1. Cash.............................................................................................. 250,000

Ordinary shares...................................................................... 250,000

2. Timberlands................................................................................. 200,000Machinery.................................................................................... 50,000

Cash........................................................................................ 250,000

3. Cash.............................................................................................. 40,000Revenue.................................................................................. 40,000

4. Depreciation expense................................................................... 12,500Timberlands (€200,000/20).................................................... 10,000Accumulated depreciation — machinery (€50,000/20)......... 2,500

5. Income tax expense...................................................................... 10,450Cash........................................................................................ 10,450

(€40,000 – €12,500) 0.38%

6. Dividends (€0.98 10,000)........................................................ 9,800Cash........................................................................................ 9,800

The amount of ordinary dividends is calculated as follows:Ordinary dividend per share, 20X4= [Total dividends – preference dividends]

÷ number of ordinary shares outstanding in 20X4= [€24,010 – (€2.875 1,137) – (€1.2 31)] ÷ 21,135 = €0.98 per share 10,000 ordinary shares = €9,800

b. (10 marks)

Cash (row 14)A B C D E F

14 Cash 140 1,2,3,4,5,7 23,300 1,2,3,5,6 19,890

A B D F14 Cash 140 =140+255000-250000-9375+40000-9375-3090 =140+250000-250000+40000-10450-9800

Machinery (row 24)A B C D E F

24 Machinery and equipment 1,099,076 2 1,149,076 2 1,149,076

A B D F24 Machinery and equipment 1099076 =1099076+50000 =1099076+50000

Timberlands (row 30)A B C D E F

30 Timber and timberlands 95,920 2,6 285,920 2,4 285,920

A B D F30 Timber and timberlands 95920 =95920+200000-10000 =95920+200000-10000

Long-term debt (net) / bonds (row 47)A B C D E F

47 Long-term debt (net)/bonds 614,937 1,3,5 853,185 614,937

A B D F47 Long-term debt (net)/bonds 614937 =614937-12370+250000+309+309 614937

Ordinary shares (row 54), Ordinary stock conversion rights (row 55), and Retained earnings (row 56)

A B C D E F54 Ordinary shares – no par value 234,362 234,362 1 484,36255 Ordinary stock conversion rights 1 17,37056 Retained earnings 234,678 239,720 241,928

A B D F54 Ordinary shares – no par value 234362 234362 =234362+25000055 Ordinary stock conversion rights 1737056 Retained earnings =212888+B79-B83 =212888+D79-D83 =212888+F79-F83

Net sales (row 67)A B C D E F

67 Net sales 730,410 4 770,410 3 770,410

A B C D E F67 Net sales 730410 4 =730410+40000 3 =730410+40000

Depreciation (row 71)A B C D E F

71 Depreciation 71,271 6 83,771 4 83,771

A B C D E F71 Depreciation 71271 6 =71271+12500 4 =71271+12500

Interest expense (row 73)A B C D E F

73 Interest expense 42,509 3,5 61,877 42,509

A B C D E F73 Interest expense 42509 3,5 =42509+9684+9684 42509

Provision for income taxes (row 78) and Profit (row 79)A B C D E F

78 Provision for income taxes 26,550 7 29,640 5 37,00079 Profit 45,800 50,842 62,850

A B C D E F78 Provision for income taxes 26550 7 =26550+3090 5 =26550+1045079 Profit =B77-B78 =D77-D78 =F77-F78

Dividends (ordinary and preference) (row 83)A B C D E F

83 Dividends (ordinary and preference) €24,010 €24,010 6 €33,810

A B C D E F83 Dividends (ordinary and preference) 24010 24,010 6 24010+9800

c. (8 marks)A B C D E F

95 Ratio analysis96 20X4# Case A Case B9798 Debt to equity** 1.61 2.02 1.0499 Debt to total assets** 0.59 0.64 0.49100 Times interest earned 2.70 2.30 3.35101 Return on assets, after taxes 5.6% 5.8% 5.8%102 Return on ordinary equity* 9.1% 9.7% 8.2%103 EPS-basic €2.00 €2.23 €1.90104105 Cash flow from operations 107,979 126,139 137,529

106 Dividends 24,010 24,010 33,810 33,810

107 Net operating cash flow after dividends 83,969 102,129 103,719

D E F98 =D50/D57 =F50/+F5799 =D50/D33 =F50/F33100 =(D77+D73)/D73 =(F77+F73)/F73101 =(D79+(D73*(1-D84)))/D33 =(F79+(F73*(1-F84)))/F33102 =(D79-(D86*D91)-(D87*D92))/((D57-D52-D53) =(F79-(F86*F91)-(F87*F92))/(F57-F52-F53)

103 =(D79-(D86*D91)-(D87*D92))/((D88*1/12)+(D89*11/12)) =(F79-(F86*F91)-(F87*F92))/((F88*1/12)+(F89*11/12))

104105 =107979+40000-9375-9375-3090 =107979+40000-10450106 =D83 =F83107 =D105-D106 =F105-F106

d. (8 marks)

From the perspective of a current shareholder, the project is desirable. It increases return on assets from 5.6 to 5.8% in the first year. (This increase becomes significantly larger in later years as the net investment in property, plant and equipment declines because of depreciation.) The cash flow from operations is about €20,000 per year higher under both financing alternatives with the project.

However, the project is a lot more attractive to existing shareholders if it is financed through debt rather than through equity. Return on ordinary equity, now 9.1%, would be increased to 9.7% if the project were financed through debt. Return would fall to 8.2% if the project were financed through equity. Basic EPS increases to €2.23 if the project is financed by debt, but decreases to €1.90 if financed by equity. Cash flow after dividends is almost identical under both alternatives.

From the perspective of a lender, the project, if financed through debt, would add a great deal of debt risk to the company’s financial structure. Debt to equity would increase from 1.42 to 2.14. Debt to total assets would increase from .59 to .68. The company is more risky from a lender’s perspective. If the project were financed through equity, both these ratios decline from the status quo, meaning that the company is less risky from a lender’s perspective. Times interest earned shows a lower margin of safety if more debt is assumed, going from 2.7 to 2.3. However, the project shows considerable positive cash flow, increasing operating cash flows by about €20,000 under either alternative. This would be of considerable comfort to lenders.

The company becomes more risky if the project is financed through debt, but the rewards of the project accrue to ordinary shareholders. This is likely the reason that convertible bonds are an attractive way to finance the project: early returns are guaranteed to debt holders, but if the project is successful and ordinary share price reflects that success, the bond holders can become equity investors.

Question 2 (12 marks)Computer solutiona. (8 marks)

A B65 RATIO ANALYSIS66 20X767 Profitability68 Return on long-term capital, after tax 11.2%69 Return on total assets, after tax 9.7%70 Return on ordinary shareholders’ equity 12.7%71 Operating margin 18.4%

A B68 Return on long-term capital, after tax =(B63+(395*(1-0.38)))/((C35+C36+C37+C45+B35+B36+B37+B45)/2)69 Return on total assets, after tax =(B63+(395*(1-0.38)))/((B26+C26)/2)70 Return on ordinary shareholders’ equity =(B63-9846)/((B45-B41+C45-B41)/2)71 Operating margin =(B63+395+B60)/B49

b. (4 marks)

Lafarge’s return ratios are all respectable, and are in line with the industry averages. In particular, the operating margin is 18.4%, indicating that 18.4% of sales euros are available to pay tax, interest, and provide return to shareholders. This is slightly better than the industry average of 18%, and implies that Lafarge has its costs and prices in control in relation to the industry.

Similarly, the company’s assets appear to be productively used, as return on assets at 9.7% is slightly better than industry, and indicates that there are few unproductive assets. Return on long-term capital shows the same pattern.

Return on ordinary equity is higher than return on assets, indicating that debt holders are paid less than the return on assets, creating value for shareholders through leverage. In fact, Lafarge has little interest-bearing debt and most of this leverage effect is caused by the zero-interest liability, future income tax. The rest of the industry is more highly levered and produces a higher return for ordinary shareholders (14.2% versus 12.7%) as a result.

Question 3 (17 marks)(7 marks for basic EPS, 8 marks for diluted, and 2 marks for presentation)

Earnings available to Weighted average Earningsordinary shareholders number of shares per share

Profit € 73,600Pref. dividends

10,000 €.50 (5,000 )68,600

Ordinary shares60,000 2 1/12 10,000120,0001 10/12 100,000150,0002 1/12 12,500250,000 0/12 0

122,500Basic EPS € 0 .56

1 60,000 shares 2; stock split2 €100,000/€1,000 300 = 30,000; 120,000 + 30,000 = 150,000

DilutedIndividual effectsPreference shares €5,000 / 100,000 = €0.05 (see calculations below)Bonds, converted €7,056 / 27,500 = €0.26Bonds, remaining €23,100 / 90,000 = €0.26

Diluted calculationBasic € 68,600 122,500 € 0.561. Pref. shares, dividends

(10,000 €0.50) 5,000Shares10,000 10 12/12 100,000

73,600 222,500 0.33

2. Actual conversion, dated back to beginning of the year*Bond conversion, interest€10,080 (1 – 0.3) 7,056Shares30,000 11/12 27,500

3. Remaining bonds*Bond conversion, interest(€43,080 – €10,080) (1 – 0.3) 23,100 Shares(€300,000/€1,000) 300 90,000

€ 103,756 340,000 Diluted EPS € 0 .305

* Individual effect is identical, so order does not matter between 2 and 3.

EPS disclosure, on the income statement or in the disclosure notes

Basic EPS 0 .56 Diluted EPS 0 .305

Question 4 (18 marks)(8 marks for basic EPS and 10 marks for diluted EPS)

Earnings available to Weighted average Earningsordinary shareholders number of shares per share

Profit € 1,100,000Preference dividends

50,000 €2 (100,000)80,000 €3 (240,000 )

€ 760,000 Shares outstanding

600,000 2/12 100,000680,000 10/12 566,667

666,667 Basic EPS € 1 .14

Diluted EPS € 1,000,000 1,097,167 € 0 .91

Test ratios

1. Preference shares, Class B(€3 80,000)/(80,000 5) = €240,000/400,000 = €0.60 share; dilutive

2. Stock option (i)Shares issued 50,000Shares retired 37,500(50,000 × €15) / 20

3. Stock option (ii)Shares issued 120,000Shares retired 102,000(120,000 × €17) / 20

Earnings available to Weighted average Earningsordinary shareholders number of shares per share

Basic totals € 760,000 666,667 € 1.14

Stock optionsStock option (i)

Shares issued 50,000Shares retired (37,500)

Stock option (ii)Shares issued 120,000Shares retired (102,000 )

760,000 697,167 1.09

Preference sharesIncome 240,000Shares 400,000

Diluted EPS 1,000,000 1,097,167 1 .09

Question 5 (18 marks)a. (6 marks)

20X6 20X7 20X8 20X9

Return on assets (after tax) 10.2% 14% 6.6% 16.3%

The rate of return earned on total assets increased favourably from 20X6 to 20X7, but 20X8 was a year of unacceptable returns. The 20X9 rate of return recovered dramatically.

The high rate of return in 20X9 will enhance the leverage factor because the after-tax borrowing rate probably was below 16.3%.

b. (6 marks)

20X6 20X7 20X8 20X9

Return on long-term capital (after tax) 12.5% 17.6% 8.1% 19.8%

This return is higher than the return on assets, indicating that interest-free working capital is used efficiently. The negative trend in 20X8 has already been highlighted.

c. (6 marks)

20X6 20X7 20X8 20X9

Return on ordinary shareholders’ equity 16.8% 24.2% 9% 28.1%

Return has been impressive, if a bit volatile. Lower returns were earned in 20X8 and should be investigated to see if the problem might recur. Comparison of ROE and ROA indicates that leverage is positive and debt is being used to the benefit of shareholders. Note that the significant increase in ROE in 20X9 was caused partially by leverage.