Exercise 8-6 , p . 490
Analyzing Financial Leverage for Shareholders ’ Returns
Rose Corporation ’ s condensed balance sheet for Year 2 is reproduced below :
Additional Information :
1 . Net income for Year 2 is $ 157,500 .
2 . Income tax rate is 50 %.
3 . Amounts for total assets and shareholders ’ equity are the same for Years 1 and 2 .
4 . All assets and current liabilities are considered to be operating
a . Determine whether leverage ( from long-term debt ) benefits Rose ’ s shareholders . ( Hint : Examine ROCE with and without leverage .)
b . Compute Rose ’ s NOPAT and RNOA ( use ending NOA ).
c . Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part b .