THIS is the only information given ROCE NOPAT margin NOA turnover Leverage ABC c

Question

THIS is the only information given

ROCE NOPAT margin NOA turnover Leverage ABC corporation is 100% equity financed, whereas XYZ has a significant amount of dept financing ABC issued cash dividend on common stock during year, and XYZ did not ABX usues FIFO method of inventory valuation and XYZ uses LIFO for inventory (assuming rising prices) ABC sold (for cash) its receivables at face value at the end of the year You are comparing the Return on Common Equity (ROCE), NOPAT margin, net operating asset turnover, and leverage of two companies in the same industry, ABC Corp and XYZ Corporation. Explain how each of the following situations will affect ROCE and the other three items for ABC relative to XYZ, all other things being equal. Answer in the following manner: If ABC will have a higher ROCE than XYZ's ROCE, then just write higher or H. If ABC will have a lower NOPAT Margin than XYZ's NOPAT Margin, just write Lower or L If both will have the same ratio, write No Effect or NE.

Explanation / Answer

ROCE NOPAT margin NOA turnover Leverage ABC corporation is 100% equity financed, whereas XYZ has a significant amount of dept financing Lower Higher No Effect Lower ABC issued cash dividend on common stock during year, and XYZ did not Higher No Effect Higher Higher ABC uses FIFO method of inventory valuation and XYZ uses LIFO for inventory (assuming rising prices) No Effect Higher Lower Lower ABC sold (for cash) its receivables at face value at the end of the year No Effect No Effect No Effect No Effect 1) The ROCE will be lower as long as XYZ return on net operating Assets is higher than the after tax cost of debt. The NOPAT margin will be higher as there is no cost of debt. The ABC is 100% is debt free company so its has low leverage 2) Cash Dividend reduced the retained earnings and it will reduced the capital employed and assets are reduced by the amount of the dividend (cash is paid), equity is reduced by the amount of the dividend (retained earnings are reduced). 3) ABC's FIFO inventory gives higher margin results in lower NOPAT margin and higher inventory results lower NOA turnover. The leverage is lower as assets and equity both are lower.

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