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.