Writing Assignment Interpreting ratiosFollowing are the debt to assets, return on assets,

Writing Assignment Interpreting ratios

Following are the debt to assets, return on assets, and return on equity ratios for four companies from two different industries. The interest rate shown for each company is its approximate average interest rate on all debt. Each of these public companies is a leader in its particular industry. The data for

Wachovia and Toll Brothers are for the fiscal years ending in 2005, and the data for Wells Fargo and

Pulte are for the fiscal years ending in 2004. All numbers are percentages.

 

 

 

 

Debt to

Return on

Return on

Interest

 

Assets

Assets

Equity

Rate

Banking Industry

 

 

 

 

Wachovia Corporation

90.3

1.2

14.0

2.1

Wells Fargo & Co.

91.1

1.6

18.5

1.0

Home Construction Industry

 

 

 

 

Pulte Corporation

56.5

9.5

21.8

3.6

Toll Brothers, Inc.

56.4

12.7

29.2

4.7

Required

a. Based only on the debt to assets ratios, the banking companies appear to have the most financial risk. Generally, companies with more financial risk have higher interest rates. Write a brief explanation of why the banking companies can borrow money at lower interest rates than the construction companies.

b. Explain why the return on equity ratio for Wachovia is more than 10 times greater than its return on assets ratio, while the return on equity ratio for Pulte is less than 3 times greater than its return on assets ratio.

 

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