Exhibit 7.15 presents the income statement and balance sheet for Companies A, B,

Question

Exhibit 7.15 presents the income statement and balance sheet for Companies A, B, and C. Compute each company's return on assets, return on equity, and return on invested capital. Based on the three ratios, which company has the best operating performance? Why does the return on assets differ between Company A and Company B? Why do companies with equity investments tend to have lower return on assets than companies with only core operations? Why does the return on equity differ between Company A and Company C? Is this difference attributable to operating performance? Does return on assets better reflect operating performance than return on equity? If not, which ratio does and why? Exhibit 7.16 presents the income statement and balance sheet for Health Co. a $600 million healthcare company. Compute NOPLAT, average invested capital, and ROIC. Assume an operating tax rate of 25 percent and a marginal tax rate of 35 percent. If the weighted average cost of capital is 9 percent, is the company creating value? Using the reorganized financial statements created in Question 4, what is the free cash flow for Health Co in the current year? You decide to look closer at HealthCo's tax reconciliation footnote. The table reports $35 million in statutory taxes, a $10 million credit for manufacturing investments, and a onetime tax expense of $5 million related to a past year audit. Reported taxes are therefore $30 million. What is Health Co's statutory tax rate, operating tax rate, and effective rate? Why does computing the operating tax rate require judgment? Many companies hold significant amounts of excess cash, cash above the amount required for day-to-day operations. Does including excess cash as part of invested capital distort the ROIC upwards or downwards? Why?

Explanation / Answer

4)NOPLAT= operating income*(1-tax rate)
=90*(1-.25)=$63 mn

average invested capital=(capital for prior year+present year)/2
=(325+390)/2=$357.5mn

ROIC=Return/ Average invested capital
=60/357.5=16.78%

yes, the company is creating values as its ROIC is greather than WACC

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