Answer the questions below based on the following information. The tax rate is 3

Question

Answer the questions below based on the following information. The tax rate is 35% and all dollars are in millions. Assume that the companies have no liabilities other than the debt shown below. Calculate each company's ROE, ROA, and ROIC. Why is Runrun's ROE so much higher than Suunto's? Does this mean Runrun Is a better company? Why or why not? Why is Suunto's ROA higher than Runrun's? What does this tell you about the two companies? How do the two companies' ROICs compare? What does this suggest about the two companies?

Explanation / Answer

b) Runrun ROE is higher than Suunto due to lower proportion of equity in runrun capital structure. Run run has lower cost of capital hence the return to shareholders will be higher. We cannot say that Runrun is bettermanaged campany because the profit margin is lesser than Suunto

c) Suunto ROA is higher because the profitabilty or return on asset is higher, the campany is running efficiently and is utilising its resources in effective manner

d) ROIC is the same as ROA in this case because ther is not short term interst bearing liabilities

Earnings before Interst and taxes 280 294 Debt (10% interst) 140 840 Equity 560 210 Interest 14 84 Earnings before taxes 266 210 taxes (35%) 93.1 73.5 Net Income 172.9 136.5 ROE 31% 65% ROA(interest added back) 27% 21% ROIC(same as ROA since no interst bearing liabilities) 27% 21%

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