The following numbers were calculated from financial statement for a firm for 20

Question

The following numbers were calculated from financial statement for a firm for 2006 and 2005:
Year: 2006 2005 ROCE: 15.2% 13.3% RNOA: 11.28% 12.75% NBC: 2.9% 3.2% Average net obligation: $2225 $241 Average common equity:4756 4173
a) how much of change in ROCE is due to operating activities and how much is due to finance activity? b) how much of change in ROCE from financing activities is due to a change in financial leverage, and how much is due to a change in spread over net borrowing costs? The following numbers were calculated from financial statement for a firm for 2006 and 2005:
Year: 2006 2005 ROCE: 15.2% 13.3% RNOA: 11.28% 12.75% NBC: 2.9% 3.2% Average net obligation: $2225 $241 Average common equity:4756 4173
a) how much of change in ROCE is due to operating activities and how much is due to finance activity? b) how much of change in ROCE from financing activities is due to a change in financial leverage, and how much is due to a change in spread over net borrowing costs?
Year: 2006 2005 ROCE: 15.2% 13.3% RNOA: 11.28% 12.75% NBC: 2.9% 3.2% Average net obligation: $2225 $241 Average common equity:4756 4173
a) how much of change in ROCE is due to operating activities and how much is due to finance activity? b) how much of change in ROCE from financing activities is due to a change in financial leverage, and how much is due to a change in spread over net borrowing costs?

Explanation / Answer

Year:

ROCE:

RNOA:

NBC:

Average net obligation(A)

Average Common equity(B)

NBC in Amount

0.06

Part a)

Year:

2006 2005

ROCE:

0.152 0.133

RNOA:

0.1128 0.1275

NBC:

0.029 0.032

Average net obligation(A)

2225 241

Average Common equity(B)

4756 4173 Net operating Assets(A+B) 6981 4414 ROCE in Amount 1061.112 587.062 RNOA in Amount 787.4568 562.785

NBC in Amount

64.525 7.712 Change Weights of % change Part 1 :- (Net Operating Assets/
Common Equity)*RNOA 16.56% 13.49% 3.07%      161.72 Part 2: - (Net Financing Debt /Common Equity)*Net Borrowing Rate 1.36% 0.18% -1.17%       -61.72 ROCE = Part 1 - Part 2 15.20% 13.30% 1.90%      100.00 Change attributable to operating Activity = 161.72% Change attributable to Financing Activity = (61.72%) Part (b) Financing Leverage (FLEV)= Net Financing Debt /Common Equity 2006 2005 Change                  0.47

0.06

                 0.41 Change attributable to FLEV = (41/61.72)*100 = 66.43% Change attributable to Spread = 100 - 66.43 = 33.57%

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