Disaggregating return measures for analyzing leverage

Assignment Help Accounting Basics

Reference no: EM132733091

EXERCISE 1 - Analyzing Financial Leverage for Alternative Financing Strategies

FIT Corporation's return on net operating assets (RNOA) is 10% and its tax rate is 40%. Its net operating assets ($4 million) are financed entirely by common shareholders' equity. Management is considering its options to finance an expansion costing $2 million. It expects return on net operating assets to remain unchanged. There are two alternatives to finance the expansion:

1. Issue $1 million bonds with 12% coupon, and $1 million common stock.

2. Issue $2 million bonds with 12% coupon.

Required -

a. Determine net operating income after tax (NOPAT) and net income for each alternative.

b. Compute return on common shareholders' equity for each alternative (use ending equity).

c. Calculate the assets-to-equity ratio for each alternative.

d. Compute return on net operating assets and explain how the level of leverage interacts with it in helping determine which alternative management should pursue.

EXERCISE 2 - Disaggregating Return Measures for Analyzing Leverage

Selected financial information from Syntex Corporation is reproduced below:

1. NOA turnover (average NOA equals ending NOA) is 2.

2. NOPAT margin equals 5%.

3. Leverage ratio (average NFO/average common equity) is 1.786, and the spread is 4.4%.

Required -

a. Compute return on net operating assets (RNOA).

b. Compute return on common equity using its three major components.

c. Analyze the disaggregation of return on common equity. What is the "leverage advantage (in percent return) accruing to common equity"?

Reference no: EM132733091

Questions Cloud

Human immunodeficiency virus : Human immunodeficiency virus (HIV) preferentially destroys CD4+ cells. Specifically, what effect does this have on antibody and cell-mediated immunity?

Ashford online library resources : Describe your experience in using the Ashford Online Library resources to conduct academic research in your written assignments.

Describe the elements of leadership power and social power : Briefly describe action learning as it relates to leader development. Describe the elements of leadership power and social power.

What think the climate change risk is to province : What you think the climate change risk is to our province/state or nation, what you think our energy use should be in the future based on our area.

Disaggregating return measures for analyzing leverage : Disaggregating Return Measures for Analyzing Leverage - Compute return on common equity using its three major components

Criminal investigators from street crime unit : You are a senior member of an arson investigations unit. You are being supported by newly assigned criminal investigators from a street crime unit

Provide a summary and a reaction to the article : Provide a summary and a reaction to the article. The summary should be approximately 250 words, and the reaction should be approximately

Identifying and setting priorities among health or community : Identifying and setting priorities among health or community issues and their behavioral and environmental determinants that stand in the way of achieving

Would you recommend the flat fee or the fee per bag : Many cities have experienced a substantial decrease in the amount of garbage being collected after they changed from levying a flat tax on each household.

User Account

All Pages