Assets
Current Assets
$250,000.00
Noncurrent Assets
$1,750,000.00
Total Assets
$2,000,000.00
Liabilities and Equity
Current Liabilities
$200,000.00
Noncurrent Liabilities (8% Bonds)
$675,000.00
Common Stockholders’ Equity
$1,125,000.00
Total Liabilities and Equity
$2,000,000.00
Additional Information:
Net income for 2014 is $157,500.
The income tax rate is 50%.
Amounts for total assets and shareholders’ equity are the same for 2013 and 2014.
All assets and current liabilities are considered to be operating.
Required:
Determine whether leverage (from long-term debt) benefits Rose’s shareholders. (Hint: Examine ROCE with and without leverage.)
Compute the NOPAT and RNOA (use ending NOA).
Demonstrate the favorable effect of leverage given the disaggregation of ROCE and your answer to part (B).
Sample Solution
