1. Kao Corporation is a Japanese toiletries and household products group. The range of its products is similar to that of US-based Procter & Gamble but the group is smaller (2001/02 sales of US$6.3 bn vs P&G's US$40 bn) and less international (domestic sales 75% vs 53% for P&G). Although Kao's profits have grown rapidly in the five years to 2002, its profitability in 2001/02 still lagged behind P&G's. P&G's group ROE in 2001/02 was 33.8%. By contrast, Kao's was only 12.9% that year. Kao's financial statements for 2001/02 are presented in condensed form in the following page: Summary income and balance sheet numbers taken from P&G's 2001/02 accounts are given below. (P&G discloses no information about minority interests. Group and parent company equity are assumed to be the same). Financial year to: Net sales Cost of sales Selling, general and administrative expenses Interest expense, net Other non-operating income, net Income taxes Net earnings Average net operating assets Average shareholders' equity Procter & Gamble 30 June 2002 US$ bn 40.24 -20.99 -12.57 -0.50 0.20 -2.03 4.35 23.27 12.86 Required (a) Calculate Procter & Gamble's and Kao's return on net operating assets (RONOA) for each company's 2001/02 financial year. P&G's marginal tax rate is 35%, Kao's is 42% that year. (b) Break down RONOA into its profit margin and assets turnover components. What are the reasons for P&G's higher profit margin? (c) The president of Kao Corporation is puzzled. P&G's RONOA in 2001/02 is only around 3.7 percentage points greater than Kao's but its ROE that year is over 20 percentage points greater (33.8% vs 12.9%). Explain the reason for P&G's superior performance at the ROE level