The components of Tofield Ltd.'s capital structure and their related costs are as follows: $\begin{array}{lr}
\text { Current liabilities } & \$ 400,000 \
\text { Long-term liabilities } & \$ 1,000,000^{1} \
\text { Preferred shares } & \$ 250,000^{2} \
\text { Common shares } & \$ 250,000^{3}\\text { Retained earnings } & \$ 672,500 \
\text { Net income } & \$ 112,500 \
{ }^{1} \$ 80.000 \text { interest paid } &\{ }^{2} \$ 12,500 \text { dividends paid }\{ }^{3} \$ 2,500 \text { dividends paid }
\end{array}$ If Tofield's corporate tax rate was 25%, what was their return on assets closest to?
A)4.4%
B)6.7%
C)7.5%
D)ROA cannot be determined from the data given.

Question

Quizplus · Accepted Answer

To calculate the Return on Assets (ROA), we use the formula: $$ROA = \frac{\text{Net Income}}{\text{Total Assets}}$$First, we calculate the total assets. Since the question doesn't specify otherwise, we assume that the sum of liabilities and equity represents the total assets. Thus, total assets = Current liabilities + Long-term liabilities + Preferred shares + Common shares + Retained earnings = $400,000 + $1,000,000 + $250,000 + $250,000 + $672,500 = $2,572,500.Next, we calculate the net income after tax, which is already given as $112,500. However, we don't need to adjust it for taxes in this calculation because it's already the net income after tax.Finally, we calculate ROA: $$ROA = \frac{\$112,500}{\$2,572,500} \approx 0.0437 \text{ or } 4.37\%$$However, none of the options exactly match this calculation. The closest option provided is 4.4%, but this was not among the choices, indicating a mistake in my explanation based on the provided options. Given the options and the correct approach to calculate ROA, it seems there was a misunderstanding in the calculation process. The correct approach involves calculating the net income after taxes (which is already provided) and dividing it by the total assets. The error in my initial explanation was in the interpretation of the options in relation to the calculated ROA. Given the options and the correct calculation, the closest match or the correct interpretation of the calculation should have been chosen based on the provided information and the standard formula for ROA.

The Components of Tofield Ltd If Tofield's Corporate Tax Rate Was 25%, What Was Their