Reference no: EM132318598
Question:
Problem 1: ROCE and EPS Calculation and Interpretation
You are given the following data for Good Company Inc. for 2004, 2005, and 2006 (amounts in thousands).
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2006
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2005
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2004
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Net Income
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$445
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$402
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$345
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Average number of common shares outstanding
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135
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134
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132
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Average common shareholder equity
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$1,231
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$964
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$735
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a. Calculate ROCE for the three years.
b. Calculate basic EPS for the three years.
c. Interpret your findings for both ROCE and EPS.
Problem 2: Financing
Niglow Corporation produces metal castings. In the past year it earned a 10% return on its net operating assets base of $10M. Niglow needs $10M to expand its operations, and has the option of obtaining none, some, or all of the proceeds from the bank.
Currently the company is all equity financed. It expects to be able to maintain its return on net operating assets after the expansion. The bank has indicated that the amount it will charge on the loan will be dependent upon the resultant debt/equity ratio.
Specifically, the rates will be 8%, 9%, 10% and 12% for debt to equity ratios less than or equal to 0.25, 0.5, 1.0 and over 1.0, respectively. Niglow's tax rate is 40%.
b. Calculate Niglow's return on common equity if the expansion is financed:
i. using all equity
ii. 50% debt, 50% equity
iii. all debt
c. What would Niglow's return on net operating assets need to be for the return on equity to be decreased by financing the expansion using all debt.