Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock outstanding. The com¬pany reported the following information for 19X7: Net sales $1,500,000 Interest expense 120,000 Income tax expense 80,000 Preferred dividends 25,000 Net income 130,000 Average assets 1,100,000 Average common stockholders' equity 400,000

a. Compute the profit margin on sales and the rates of return on assets and common stockholders' equity, rounding calculations to two decimal places.

b. Does the firm have positive or negative financial leverage? Briefly ex¬plain.