Chapter 5

Question 1

Under what conditions would a firm’s ROCE be = to its RNOA?

Answer 1

Fin leverage equation. 2 rates of return will be the same in either of the following conditions:

(a) The SPREAD is zero, that is, RNOA = NBC
(b) FLEV = 0, that is, FA = FO

Question 2

Performance Analysis under Clean Surplus Acc

Answer 2

to analyse the drivers of current probability, by conducting the so-called fin. analysis

Question 3

Under What condition would a firm’s RNOA be equal to its ROOA?

Answer 3

Applies the op. liability leverage equation.
The two rates of return will be the same in either of the following conditions:
(a) The op. liability leverage spread (OLSPREAD) is zero, that is, ROOA = the implicit borrowing rate for op. liabilities.
(b) op. liability leverage (OLEV) is zero, that is, the firm has no op. liabilities.

Question 4

Why borrow?

Answer 4

If the assets in which the cash from issuing debt is invested earn at a rate, RNOA, greater than the borrowing cost of the debt, ROCE increases; SHs earn from the SPREAD.

Question 5

Explain Why Op. Liabilities might lever up the RNOA

Answer 5

The use of op liabilities reduces the NOA investment required.
This result in a higher RNOA.
If a firm can generate income using the liabilities that are higher than the implicit cost that creditors charge for the Cr, it increases its RNOA.
This condition is captured by the OLSPREAD.

Question 6

Asset turnover

Answer 6

= Sales/Total Assets

Question 7

Net Profit Margin

Answer 7

= Net Profit/Sales

Question 8

TR turnover

Answer 8

=Sales/AR

Question 9

PPE turnover

Answer 9

= Sales/Net PPE

Question 10

Interest Coverage Ratio (earnings basis)

Answer 10

= EBIT(OI)/Int. expenses