In the attached files are the questions to be answered and the information neede

Question

In the attached files are the questions to be answered and the information needed to answer them. Answer all parts of the question completely.

Questions: 3-25, 3-32

3-25:

a) Compute the 2010 return on net operating assets (RNOA) for each company.

b) Disaggregate RNOA into net operating profit margin (NOPM) and net operating asset turnover (NOAT) for each company.

c) Discuss any differences in these ratios for each company.

3-32:

a) Compute the liabilities-to-equity ratio for each year and discuss any noticeable change.

b) What is your overall assessment of the company’s financing risks from the analyses part in part a? Explain.

Explanation / Answer

Solution 3-25

1) RNOA

CVS: $3,777 / {($46,360 + $45,889) / 2} = 8.19%

Walgreen: $2,145 / {($14,921+$14,140)/ 2} = 14.76%

2) NOPM = NOPAT / Sales

CVS: 3.92% (=$3,777 / $96,413)

Walgreen: 3.18% (=$2,145 / $67,420)

NOAT = Sales / Average NOA

CVS: $96,413 / {($46,360 + $45,889) / 2} = 2.09

Walgreen: $67,420 / {($14,921 + $14,140) / 2} = 4.64

3) Walgreen’s RNOA is much higher compared to CVS’s, primarily driven by a much higher turnover rate for NOA because the net operating profit margin is less compared to CVS’. This example highlights the significance of the management in handling the balance sheet

Solution E3-32

1) Year-2010: Total liabilities-to-equity = 1.53 (= $133,093 / $86,912)

Year-2009: Total liabilities-to-equity = 1.70 (= $142,764 / $84,143)

From the above computations, Verizon’s total liabilities-to-equity ratio has declined and is lower than the 1.67 average for firms in the telecommunications industry in 2010

2) Verizon is carrying a high amount of debt. Although the operating cash flow and its profitability are fairly strong, however the company neither is particularly high in relation to the it’s liabilities and the cost of interest. There is some question which arises in regard to the amount of additional debt that Verizon can take on. Given its significant capital expenditure need and load of its current debt, the company may have to fund future capital expenditures with higher-cost equity. And, to the extent that its rivals are not as highly leveraged, this may impact company negatively on rivalry position

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