Exam 8: Return on Invested Capital and Profitability Analysis

When calculating return on net operating assets analysts sometimes make adjustments to the net operating asset base used in the denominator or the ratio. Three possible adjustments are listed below. Explain what these adjustments are, and discuss the merits of these adjustments. 1. Non-operating asset adjustment 2. Intangible asset adjustment 3. Accumulated depreciation adjustment

Which of the following is the best measure of operating efficiency?

You are given the following data for Good Company Inc. for 2004, 2005, and 2006 (amounts in thousands). 2006 2005 2004 Net income \ 445 \ 402 \ 345 Average number of common shares outstanding 135 134 132 Average common shareholder' equity \ 1,231 \ 964 \ 735 a. Calculate ROCE for the three years. b. Calculate basic EPS for the three years. c. Interpret your findings for both ROCE and EPS.

The following information relates to Yutter Corporation: Year 1 Net income-year ended 12/31 \ 12,500 Dividends 3,000 Return on net operating assets 13\% Return on equity 15\% Cost of equity 12\% -What is Yutter's sustainable equity growth rate?

It is possible to have an increasing return on net operating assets while net operating profit margin is decreasing.

The accounting-based stock valuation formula calculates the value of a stock as the book value of the net operating assets plus the present value of future expected dividends discounted at the cost of equity.

Which of the following statements is correct?

An advantage of leverage that benefits common stockholders is successful trading on the equity.

When calculating return on total equity, it is normal to add back preferred dividends to net income.

Cost of goods sold divided by inventory provides information about:

Which of the following situations is most likely to explain an accounts receivable turnover that is lower than the industry norm?

It is possible to have increasing earnings growth while having decreasing return on net operating assets.

When considering the difference between return on net operating assets (RNOA) and return on common shareholders' equity (ROCE), which of the following statements is incorrect?

Operating assets Short-term debt 10,500 \ 10,000 Long-term debt 3,5000 1,000 Minority interest 500 4,000 Common equity 5,500 5,000 Operating income 1,350 Interest expense 350 Tax expense (40\%) 400 Minority interest 50 Net income 550 -Return on operating assets for 2005 is:

Selected information for Acme Corp.: Year 1 Year 2 Year 3 Cash \ 1,000 \ 1,500 \ 1,500 Marketable securities 8,000 2,000 2,000 Accounts receivable, net 2,000 3,000 2,500 Other current assets 2,500 3,000 3,000 Property, plant, and equipment 4,500 6,000 7,000 Less: accumulated depreciation (4,000) (4,200) (4,400) Goodwill and other intangibles 5,000 7,500 1,000 -When calculating Acme's return on net operating assets in Year 3, which of the following adjustments to the asset base is most appropriate to consider?

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 the most plausible explanation of the difference in observed net operating profit margins?