Why is there a positive leverage from use of debt? How can we tell that? Dec. 31, Year 3Dec. 31, Year 2Dec. 31, Year 1Total assets$3,000,000$2,700,000$2,400,000Notes payable (10% interest)1,000,0001,000,0001,000,000Common stock400,000400,000400,000Preferred $6 stock, $100 par200,000200,000200,000Retained earnings1,126,000896,000600,000The Year 3 net income was $242,000 and the Year 2 net income was $308,000. No dividends on common stock weredeclared during the 3 years.a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equityfor Years 2 and 3. If required, round your answers to one decimal place.Year 3Year 2Return on Total Assets12%16%Return on Stockholders' Equity15%22.8%Return on Common Stockholders' Equity16.3%25.8%b. What conclusion can be drawn from these data as to the company's profitability?The profitability ratios indicate that The Winter Group's profitability has deteriorated vMost of this change is from netincome falling vin Year 3. There is negative Xleverage from use of debt.

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Description: Why is there a positive leverage from use of debt? How can we tell that? Dec. 31, Year 3Dec. 31, Year 2Dec. 31, Year 1Total assets$3,000,000$2,700,000$2,400,000Notes payable (10% interest)1,000,0001,000,0001,000,000Common stock400,000400,000400,000Pr

Positive leverage: Leverage is the concept of investment by using the borrowed funds. Positive…

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Business

Accounting

Why is there a positive leverage from use of debt? How can we tell that?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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