ROCE NOPAT margin NOA turnover Leverage ABC corporation is 100% equity financed,
ID: 2787928 • Letter: R
Question
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 = Earnings before interest and taxes (EBIT) / Capital Employed ABC - NE No effect
Return on equity = Net income / Shareholders equity - Low
NOPAT margin = Operating Income x (1 - Tax Rate). - H
NOA turnover = Asset turnover = Revenue / Average total assets = High
Leverage = Total Debt / Total Equity = High
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