Ware Company Has a Return on Assets of 15% and a Return

question 140

Essay

Ware Company has a return on assets of 15% and a return on common stockholders' equity of 10%.John Ware,the president of the company,has asked you to explain the reason for this difference.What causes the difference? How is the concept of financial leverage involved?

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Definitions:

Credit Department

The division within a company or financial institution that is responsible for managing customer credit and collecting payments.

DSO

Days Sales Outstanding (DSO) is a measure of the average number of days that it takes a company to collect payment after a sale has been made.

Money

An officially issued legal tender that typically includes coins and paper notes, used as a medium of exchange for goods and services.

Cash Sales

Transactions where payment for goods or services is made immediately in cash or via electronic means rather than on credit.