Reference no: EM133022490

Rose Corporation's condensed balance sheet for Year 2 is reproduced below:Assets

Current assets.................$ 250,000

Noncurrent assets ..............1,750,000

Total assets ...................$2,000,000

Liabilities and Equity

Current liabilities...............$ 200,000

Noncurrent liabilities (8% bonds) . .675,000

Common stockholders' equity. . . . . .1,125,000

Total liabilities and equity . . . . . . . .$2,000,000

Additional Information:

1. Net income for Year 2 is $157,500.

2. Income tax rate is 50%.

3. Amounts for total assets and shareholders' equity are the same for Years 1 and 2.

4. All assets and current liabilities are considered to be operating.

Required:

a. Determine whether leverage (from long-term debt) benefits Rose's shareholders. (Hint: Examine ROCE with and without leverage.)

b. Compute Rose's NOPAT and RNOA (use ending NOA).

c. Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part b.