Which of the following is correct concerning changes at Tricrop from Year 1 to Year 2? $\begin{array}{lll}&\text { RNOA }&\text { ROCE }\\ \text { A) } & \text { Increased } & \text { Increased } \\ \text { B) } & \text { Increased } & \text { Decreased } \\ \text { C) } & \text { Decreased } & \text { Decreased } \\ \text { D) } & \text { Decreased } & \text { Increased } \end{array}$

A) Option A B) Option B C) Option C D) Option D A) Option A B) Option B C) Option C D) Option D

Below are selected ratios for Manufacturers Corporation. Use this information answer the following questions.$\begin{array}{llrr} &\text { Year } 1&\text { Year } 2&\text { Year } 3\\ \text { 1. Net operating asset turnover } & 1.4 & 1.31 & 1.25 \\ \text { 2. Inventory turnover } & 5.6 & 5.0 & 4.6 \\ \text { 3. Accounts receivable turnover } & 12.1 & 11.9 & 12.1 \\ \text { 4. Fixed assets turnover } & 1.3 & 1.29 & 1.29 \\ \text { 5. Net operating profit margin } & 4.5 \% & 4.6 \% & 4.8 \% \\ \text { 6. Net operating assets/equity } & 2.10 & 1.98 & 1.77 \\ \text { 7. EBIT/revenues } & 8.9 \% & 8.6 \% & 8.6 \% \\ \text { 8. Gross margin } & 20.1 \% & 19.9 \% & 19.8 \% \\ \text { 9. Income tax rate } & 35 \% & 35 \% & 35 \% \end{array}$ a. Calculate return on net operating assets for all three years. Identify reasons for any changes. b. Calculate return on equity for all three years. Comment on changes.

a. RNOA has declined in year 2 and year

Below are selected ratios for Widget Corporation and Tools Inc. Use this information to answer the following questions.$\begin{array}{c} \begin{array}{ll}\\ \text { 1. } & \text { Net operating asset turnover } \\ \text { 2. } & \text { Inventory turnover } \\ \text { 3. } & \text { Accounts receivable turnover } \\ \text { 4. } & \text { Fixed assets turnover } \\ \text { 5. } & \text { Net operating profit margin } \\ \text { 6. } & \text { Assets-to-equity } \\ \text { 7. } & \text { EBIT/revenues } \\ \text { 8. } & \text { Gross margin } \\ \text { 9. } & \text { Income tax rate } \end{array} \begin{array}{rr} \text { Widget Corp.}&\text { Tools, Inc. }\\ 2.0 & 2.0 \\ 4.6 & 4.0 \\ 12.0 & 12.0 \\ 1.8 & 2.0 \\ 4.5 \% & 2.9 \% \\ 2.10 & 3.3 \\ 9.9 \% & 8.6 \% \\ 21.1 \% & 19.8 \% \\ 35 \% & 35 \% \end{array} \end{array}$ a. Which company has a higher return on equity? b. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)? c. Which company has better operating performance (that is, ignoring capital structure).

a. Tools Inc. has the higher ROCE. b. To

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data: $\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\\ \text { Net operating assets/common equity } & 1.37 & 1.53 \\ \text { Net operating profit margin } & 19 \% & 21 \% \\ \text { Income tax rate } & 47 \% & 28 \% \\ \text { Revenues/net operating assets } & 0.81 & 0.61 \\ \text { EBIT/revenues } & 38 \% & 32 \% \end{array}$ -Which of the following statements is correct?

A) Widget has higher RNOA than Tools. B) Widget has lower RNOA than Tools. C) Widget has same RNOA as Tools. D) Insufficient information to calculate RNOA. A) Widget has higher RNOA than Tools. B) Widget has lower RNOA than Tools. C) Widget has same RNOA as Tools. D) Insufficient information to calculate RNOA.

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data: $\begin{array}{lll}&\text { Widget Co. }&\text { Tools Inc. }\\ \text { Net operating assets/common equity } & 1.37 & 1.53 \\ \text { Net operating profit margin } & 19 \% & 21 \% \\ \text { Income tax rate } & 47 \% & 28 \% \\ \text { Revenues/net operating assets } & 0.81 & 0.61 \\ \text { EBIT/revenues } & 38 \% & 32 \% \end{array}$ -Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

A) Widget has greater interest expense and taxes. B) Widget has greater interest expense but lower taxes. C) Widget has lower interest expense but higher taxes. D) Widget has lower interest expense and taxes. A) Widget has greater interest expense and taxes. B) Widget has greater interest expense but lower taxes. C) Widget has lower interest expense but higher taxes. D) Widget has lower interest expense and taxes.

Exam 8: Return on Invested Capital and Profitability Analysis

The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's success with financial leverage.

(True/False)

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Question 41

When calculating return on equity minority, interest is added to the numerator as it has been deducted in arriving at net income.

(True/False)

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Question 42

Which of the following statements about the relationship between RNOA and ROCE is correct?

(Multiple Choice)

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Question 43

Eyster Corporation reported $10 million in earnings and paid dividends of $3 million for fiscal 2005. Return on equity and dividend payout are expected to remain constant for the foreseeable future. Net book value at the end of fiscal 2004 was 100 million. Cost of equity is 10%. Using the residual income method, the intrinsic value of Eyster's stock at the end of 2005 should be:

(Multiple Choice)

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Question 44

Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.

(True/False)

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Question 45

When calculating return on net operating assets, interest expense net of tax is added back to net income for purposes of calculating the numerator. What tax rate should be used?

(Multiple Choice)

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Question 46

Which of the following is correct concerning changes at Tricrop from Year 1 to Year 2? RNOA ROCE A) Increased Increased B) Increased Decreased C) Decreased Decreased D) Decreased Increased

(Multiple Choice)

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Question 47

Which of the following situations is most likely to explain a net operating asset turnover that is higher than the industry norm?

(Multiple Choice)

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Question 48

Below are selected ratios for Manufacturers Corporation. Use this information answer the following questions. Year 1 Year 2 Year 3 1. Net operating asset turnover 1.4 1.31 1.25 2. Inventory turnover 5.6 5.0 4.6 3. Accounts receivable turnover 12.1 11.9 12.1 4. Fixed assets turnover 1.3 1.29 1.29 5. Net operating profit margin 4.5\% 4.6\% 4.8\% 6. Net operating assets/equity 2.10 1.98 1.77 7. EBIT/revenues 8.9\% 8.6\% 8.6\% 8. Gross margin 20.1\% 19.9\% 19.8\% 9. Income tax rate 35\% 35\% 35\% a. Calculate return on net operating assets for all three years. Identify reasons for any changes. b. Calculate return on equity for all three years. Comment on changes.

(Essay)

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Question 49

The two components of RNOA, net operating profit margin and NOA turnover, are independent of each other.

(True/False)

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Question 50

When calculating return on net operating assets, the numerator is net income plus minority interest.

(True/False)

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Question 51

When calculating return on net operating assets it may be necessary to adjust assets to reflect the fact that not all assets are operating assets.

(True/False)

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Question 52

An analysis of a company's performance requires joint analysis of net income in relation to the invested capital.

(True/False)

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Question 53

Which of the following statements about the equity growth rate is correct? I. The higher the ROCE the higher equity growth rate, all other things equal. II. The higher the dividend payout the higher the equity growth rate. III. The equity growth rate is unaffected by the cost of debt. IV. The equity growth rate indicates the expected growth in stock price each period.

(Multiple Choice)

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Question 54

Which of the following statements about the return on shareholders' investment (ROSI) is correct?

(Multiple Choice)

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Question 55

Below are selected ratios for Widget Corporation and Tools Inc. Use this information to answer the following questions. 1. Net operating asset turnover 2. Inventory turnover 3. Accounts receivable turnover 4. Fixed assets turnover 5. Net operating profit margin 6. Assets-to-equity 7. EBIT/revenues 8. Gross margin 9. Income tax rate Widget Corp. Tools, Inc. 2.0 2.0 4.6 4.0 12.0 12.0 1.8 2.0 4.5\% 2.9\% 2.10 3.3 9.9\% 8.6\% 21.1\% 19.8\% 35\% 35\% a. Which company has a higher return on equity? b. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)? c. Which company has better operating performance (that is, ignoring capital structure).

(Essay)

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Question 56

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data: Widget Co. Tools Inc. Net operating assets/common equity 1.37 1.53 Net operating profit margin 19\% 21\% Income tax rate 47\% 28\% Revenues/net operating assets 0.81 0.61 EBIT/revenues 38\% 32\% -Which of the following statements is correct?

(Multiple Choice)

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Question 57

Widget Co. and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data: Widget Co. Tools Inc. Net operating assets/common equity 1.37 1.53 Net operating profit margin 19\% 21\% Income tax rate 47\% 28\% Revenues/net operating assets 0.81 0.61 EBIT/revenues 38\% 32\% -Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this better as a percentage of sales?

(Multiple Choice)

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Question 58

Return on equity can be expressed as return on net operating assets multiplied by leverage (net operating assets/equity) and by earnings leverage.

(True/False)

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Question 59

Purchases divided by accounts payable provides information about:

(Multiple Choice)

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Question 60

The relation between a company's return on common equity (ROCE) and return on net operating assets (RNOA) reveals information about the company's success with financial leverage.

When calculating return on equity minority, interest is added to the numerator as it has been deducted in arriving at net income.

Which of the following statements about the relationship between RNOA and ROCE is correct?

Practice considers a segment significant if its sales, operating income (or loss), or identifiable assets are 30% or more of the combined amounts of all the company's operating assets.

When calculating return on net operating assets, interest expense net of tax is added back to net income for purposes of calculating the numerator. What tax rate should be used?

Which of the following is correct concerning changes at Tricrop from Year 1 to Year 2? RNOA ROCE A) Increased Increased B) Increased Decreased C) Decreased Decreased D) Decreased Increased

Which of the following situations is most likely to explain a net operating asset turnover that is higher than the industry norm?

The two components of RNOA, net operating profit margin and NOA turnover, are independent of each other.

When calculating return on net operating assets, the numerator is net income plus minority interest.

When calculating return on net operating assets it may be necessary to adjust assets to reflect the fact that not all assets are operating assets.

An analysis of a company's performance requires joint analysis of net income in relation to the invested capital.

Which of the following statements about the return on shareholders' investment (ROSI) is correct?

Return on equity can be expressed as return on net operating assets multiplied by leverage (net operating assets/equity) and by earnings leverage.

Purchases divided by accounts payable provides information about:

Overview of Financial Statement Analysis

Financial Reporting and Analysis

Analyzing Financing Activities

Analyzing Investing Activities

Analyzing Investing Activities: Intercorporate Investments

Analyzing Operating Activities

Cash Flow Analysis

Prospective Analysis

Credit Analysis

Equity Analysis and Valuation

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