(a) (1) Return on assets = Net income / total assets
Net income=58,333
Total assets = total liabilities + stockholder’s equity
Total assets = 1,228,313+176,413
Total assets = 1,404,726
Return on assets = (58,333/1,404,726) = 4.15%

(2) Return on stockholder’s equity = net income / total stockholder’s equity
Net income = 58,333
Total stockholder equity = 176,413
Return on stockholder’s equity = (58,333 / 176,413) = 33.07%

(3) Debt to assets ratio = total debt / total assets
Total debt = 1,228,313
Total assets = 1,404,726
Debt to assets ratio = 1,228,313 / 1,404,726
Debt to assets ratio = .874 (87.4%)

(b) The operating performance and financial position of Sepracor looks very good. Industry average on return on assets (3.5%) put Sepracor’s ROA (4.15%) in an above average position. Return on stockholder’s equity looks great also, 33.07% compared to a 16% industry average. Unfortunately, Sepracor’s debt to assets ratio appears to be too high (87.4%) for the industry expectance (75%). I would suggest holding off on an investment at this time due to the risk involved and the 5% rate of return looks a little low unless the Sepracor stock price rises quite substantially and gains can be converted to common stock. (c) Let’s look and an equity component of Sepracor’s convertible bonds of $150,000 and we would assume that Bayer had convertible bonds and allocated it between debt and equity. We would follow IFRS and separately record debt and equity components of convertible bonds as liabilities and stockholders’ equity. This would in turn make Sepracor’s ratios better comparable to Bayer. The reclassification below shows Sepracor’s with a higher stockholder’s equity and lower debt. This puts Sepracor closer to industry averages and may not be as risky with the 5% as previously thought.

Reclassified with $150,000 equity component of Sepracor’s