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Chapter_07-Solutions_ABP_revisions_Monday_mar28

Chapter_07-Solutions_ABP_revisions_Monday_mar28 - Valuation...

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Valuation Measuring and Managing the Value of Companies 5th Edition Chapter 7 Solutions Reorganizing the Financial Statements Version 1.0 April 1, 2010 Revisions by Annette Poulsen March 26, 2011 Revised March 28, 9 pm.
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Chapter 7 Questions 1-3 Ratio Company A Company B Company C Return on assets 14.3% 13.0% 11.4% Return on equity 15.8% 14.3% 21.8% Return on invested capital 15.8% 15.8% 15.8% Question 1 Return on invested capital best measures operating performance. All three companies have the sa Question 2 Companies that hold less than 20% of another company (or subsidiary) only record income when d profits will be under reported. This causes return on assets to be distorted downwards. Since Com has $50 million in equity investments, but no corresponding income, its ROA is lower than Compan Question 3 Company C's return on equity outpaces both Company A and Company B because the company u will magnify operating results. Leverage makes good results look great, but can bankrupt companie Invested capital = operating assets - operating liabilities Invested capital also = debt + equity Noplat = (Revenues - Operating costs - Depreciation) * (1 - tax rate)
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=net income / assets =net income / equity =noplat / IC (= inventories + PPE - accounts payable) ame operating performance! dividends are paid. Therefore, mpany B ny A. uses leverage. Leverage es with poor performance.
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Chapter 7 Question 4 ADDITION FROM PREVIOUS POST: TAX AUDIT EXPENSE ON Q6
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