Selected financial statement data from Texas Telecom, Inc., for Years 5 and 9 are reproduced
below ($ millions):
Year 5
Year 9
Income Statement Data
Revenues
$542
$979
Operating income
35
68
Interest expense
7
0
Pretax income
28
68
Income taxes
14
34
Net income
Balance Sheet Data
Long-term operating assets
$ 52
$ 63
Working capital
123
157
Total liabilities
50
0
Total shareholders” equity
125
220
Required:
a. Calculate return on common equity and disaggregate ROCE for Years 5 and 9 using end-of-year values for computations requiring an average (assume fixed assets and working capital are operating and a 50% tax rate).
b. Comment on Texas Telecom”s use of financial leverage.