Exam 8: Return on Invested Capital and Profitability Analysis

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

Return on equity is the return stockholders have received during the past year.

WidgetCo and Tools Inc. both operate in the same industry. They are capital-intensive companies producing widgets. Below are selected data WidgetCo Tools 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?

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. Nonoperating asset adjustment. Intangible asset adjustment. Accumulated depreciation adjustment

Which of the following statements is correct concerning changes from year 1 to year 2 at Tricrop?

Eyster Corporation reported $10M in earnings and paid dividends of $3M 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 100M. Cost of equity is 10%. Using the residual income method, the intrinsic value of Eyster's stock at the end of 2005 should be:

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

Below are the net operating asset turnovers and net operating profit margins for companies that operate in three different industries (A, B and C). The industries are grocery stores, oil extraction and drug industry. NOPAT Margin Net Operating Asset Turnover Industry A 8.0\% 1.5 Industry B 1.2\% 5.5 Industry C 5.4\% 1.0 Match the industry to A, B or C Grocery Retail Oil and Gas Drug A) B C A B) B A C C) C A B D) C B A

Selected information for Acme Corp.: Year 1 Cash 1,000 Marketable securities 8,000 Occounts receivable-net 2,000 Other current assets 2,500 Property, plant and equipment 4,500 Less: accumulated depreciation (4,000) Gess: accumulated depreciation 5,000 Year 2 Year 3 1,500 1,500 2,000 2,000 3,000 2,500 3,000 3,000 6,000 7,000 (4,200) (4,400) 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?

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

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

Return on net operating assets is a better measure of operating performance than return on equity, as it is independent of the form of financing.

Widget has a higher EBIT/Revenue but lower net operating profit margin than Tool. Which of the following statements could explain this? As a percentage of sales:

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

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?

Indicate the effect of the following transactions on: i.Return on net operating Assets (RNOA) ii. Return on common stockholders equity (ROCE) iii. Earnings per share (basic) Consider each transaction independently and explain your answer. Assume that ROCE is higher than RNOA. Company issues more preferred stock and uses proceeds to reduce accounts payable Company has a stock split Company converts to just-in-time inventory system (JIT). This allows them to hold half the levels of inventory for the same amount of sales (sales themselves are not increased by this change to JIT).

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.

Which of the following would explain an observed decrease in return on equity, all else equal?

Which of the following will increase the sustainable equity growth of a company, all other things equal?

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