Notes 18

Notes 18 - Avg common shareholders’ equity •(Beg Year...

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Financial Ratios: ROA and ROE We need both to account for debt Adjusted ROA: o Adjusted to remove interest expense o ROA equals (NI + (1 – Tax)(Int. Exp.))/ Avg. Total Assets Avg. Total Assets: (Beg. Year total plus end year total)/ 2 o Measures ROA based on average assets available during year Disaggregating ROA: o ROA = (adj. NI/ avg. total assets) o = (adj. NI/ sales) x (sales/ avg. total assets) o = (profit margin x asset turnover) If there is a problem, is it because of gross, operating, or net margin? How to determine sources of ROA variation: o Disaggregate profit margin and turnover Return on Common Equity: o NI available to common stockholders/ avg. common shareholders’ equity
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Unformatted text preview: Avg. common shareholders’ equity: • (Beg. Year plus end year)/ 2 • Disaggregate ROE: o ROCE = (NI/ avg. total assets) x (avg. total assets/ avg. shareholders’ equity) o = (ROA x financial leverage) • Differences between ROA and ROE • Financial leverage index: o = ROE/ adjusted ROA o If it is > 1, firm employs debt beneficially o If it is < 1, firm is not using debt successfully • Ex. question: o “Please compare co. to industry based on profit. Ratios, efficiency ratios, etc.; how are they trending over multi-year period?”...
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This note was uploaded on 06/10/2011 for the course BUSI 407 taught by Professor Bowen during the Spring '11 term at UNC.

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Notes 18 - Avg common shareholders’ equity •(Beg Year...

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