Hometown Resources, Inc. has a 9% rate of return on total assets and the industry average is 12%. How was the 9% rate of return on total assets computed? Comment on this information.
What will be an ideal response?
The 9% percent rate of return is computed by dividing net income plus interest expense by average total assets. For each $1.00 invested in its average assets, Hometown earned $0.09 in profits before considering interest expense. This is $0.03 below the industry average. Hometown needs to evaluate its average assets and net income to see where improvements can be made.
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