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# 05 201014 Net Income \$:4172 Average number of common shares outstanding 125 124 12 2 Average common shareholder Equity \$1.

1)

ROCE and EPS Calculation and Interpretation amounts are thousands

a. Calculate ROCE for the three years.

b. Calculate basic EPS for the three years.

c. Interpret your findings for both ROCE and EPS.

2)

Niglow Corporation produces metal castings. In the past year it earned a 10% return on its net operating assets base of \$10M. Niglow needs \$10M to expand its operations, and has the option of obtaining none, some, or all of the proceeds from the bank. Currently the company is all equity financed. It expects to be able to maintain its return on net operating assets after the expansion. The bank has indicated that the amount it will charge on the loan will be dependent upon the resultant debt/equity ratio. Specifically, the rates will be 8%, 9%, 10% and 12% for debt to equity ratios less than or equal to 0.25, 0.5, 1.0 and over 1.0, respectively. Niglow's tax rate is 40%.

b. Calculate Niglow's return on common equity if the expansion is financed:

i. using all equity

ii. 50% debt, 50% equity

iii. all debt

c. What would Niglow's return on net operating assets need to be for the return on equity to be decreased by financing the expansion using all debt.

20:05
201014
Net Income
\$:4172
Average number of common
shares outstanding
125
124
12 2
Average common shareholder
Equity
\$1. 231
\$725

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