4.2 Earnings per Share. Firm A reports an increase in earnings per share; Firm B reports a decrease in earnings per share. Is this unconditionally informative about each firm's performance? If not, why is earnings per share so commonly discussed in the financial press? 4.3 Pro Forma Earnings. Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. For example, in Twitter's initial public offering filings with the SEC, the company reported a net loss of $79.4 million, but prominently disclosed adjusted EBITDA" of (positive) $21.2 million. Discuss the merits and shortcomings of this managerial practice. 4.4 Profit Margin for ROA versus ROCE. Describe the difference between the profit margin for ROA and the profit margin for ROCE. Explain why each profit margin is appropriate for measuring the rate of ROA and the rate of ROCE, respectively. 4.5 Concept and Measurement of Financial Leverage. Define financial leverage. Explain how financial leverage works to the benefit of the common shareholders. 4.7 Disadvantages of Financial Leverage. The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up their firm by borrowing and investing the funds in profitable assets? 4.9 Return on Common Shareholders' Equity versus Basic Earnings per Common Share. Analysts can compare ROCEs across companies but should not compare basic EPSs despite the fact that both ratios use net income to the common shareholders in the numerator. Explain. EXERCISES 4.10 Calculating ROA and Its Components. Nucor, a steel manufacturer, reported net income for 2008 of $1,831 million on sales of $23,663 million. Interest expense for 2008 was $135 million, and noncontrolling interest was $314 million for 2008. The income tax rate is 35%. Total assets were $9,826 million at the beginning of 2008 and $13,874 million at the end of 2008. Compute the rate of ROA for 2008 and disaggregate ROA into profit margin for ROA and assets turnover components. 4.11 Calculating ROCE and Its Components. Phillips-Van Heusen, an apparel manufacturer, reported net income (amounts in thousands) for Year 4 of $58,615 on sales of $1,460,235. It declared preferred dividends of $21,122. Preferred shareholders' equity totaled $264,746 at both the beginning and end of Year 4. Common shareholders' equity totaled $296,157 at the beginning of Year 4 and $364,026 at the end of Year 4. Phillips-Van Heusen had no noncontrolling interest in its equity. Total assets were $1,439,283 at the beginning of Year 4 and $1,549,582 at the end of Year 4. Compute the rate of ROCE for Year 4 and disaggregate it into profit margin for ROCE, assets turnover, and capital structure leverage ratio components. 4.12 Calculating Basic and Diluted EPS. TJX, Inc., an apparel retailer, reported net income amounts in thousands) of $609,699 for Year 4. The weighted average of common shares outstanding during Year 4 was 488,809 shares. TJX, Inc., subtracted interest expense net of tax saving on convertible debt of $4,482. If the convertible debt had been converted into common stock, it would have increased the weighted average common shares outstanding by 16,905 shares. TJX, Inc., has outstanding stock options that, if exercised, would increase the weighted average of common shares outstanding by 6,935 shares. Compute basic and diluted earnings per share for Year 4, showing supporting computations. 4.2 Earnings per Share. Firm A reports an increase in earnings per share; Firm B reports a decrease in earnings per share. Is this unconditionally informative about each firm's performance? If not, why is earnings per share so commonly discussed in the financial press? 4.3 Pro Forma Earnings. Firms often provide supplemental disclosures that report and discuss income figures that do not necessarily equal bottom-line net income from the income statement. For example, in Twitter's initial public offering filings with the SEC, the company reported a net loss of $79.4 million, but prominently disclosed adjusted EBITDA" of (positive) $21.2 million. Discuss the merits and shortcomings of this managerial practice. 4.4 Profit Margin for ROA versus ROCE. Describe the difference between the profit margin for ROA and the profit margin for ROCE. Explain why each profit margin is appropriate for measuring the rate of ROA and the rate of ROCE, respectively. 4.5 Concept and Measurement of Financial Leverage. Define financial leverage. Explain how financial leverage works to the benefit of the common shareholders. 4.7 Disadvantages of Financial Leverage. The intuition behind the benefits of financial leverage is that a firm can borrow funds that bear a certain interest rate but invest those funds in assets that generate returns in excess of that rate. Why would firms with high ROAs not keep leveraging up their firm by borrowing and investing the funds in profitable assets? 4.9 Return on Common Shareholders' Equity versus Basic Earnings per Common Share. Analysts can compare ROCEs across companies but should not compare basic EPSs despite the fact that both ratios use net income to the common shareholders in the numerator. Explain. EXERCISES 4.10 Calculating ROA and Its Components. Nucor, a steel manufacturer, reported net income for 2008 of $1,831 million on sales of $23,663 million. Interest expense for 2008 was $135 million, and noncontrolling interest was $314 million for 2008. The income tax rate is 35%. Total assets were $9,826 million at the beginning of 2008 and $13,874 million at the end of 2008. Compute the rate of ROA for 2008 and disaggregate ROA into profit margin for ROA and assets turnover components. 4.11 Calculating ROCE and Its Components. Phillips-Van Heusen, an apparel manufacturer, reported net income (amounts in thousands) for Year 4 of $58,615 on sales of $1,460,235. It declared preferred dividends of $21,122. Preferred shareholders' equity totaled $264,746 at both the beginning and end of Year 4. Common shareholders' equity totaled $296,157 at the beginning of Year 4 and $364,026 at the end of Year 4. Phillips-Van Heusen had no noncontrolling interest in its equity. Total assets were $1,439,283 at the beginning of Year 4 and $1,549,582 at the end of Year 4. Compute the rate of ROCE for Year 4 and disaggregate it into profit margin for ROCE, assets turnover, and capital structure leverage ratio components. 4.12 Calculating Basic and Diluted EPS. TJX, Inc., an apparel retailer, reported net income amounts in thousands) of $609,699 for Year 4. The weighted average of common shares outstanding during Year 4 was 488,809 shares. TJX, Inc., subtracted interest expense net of tax saving on convertible debt of $4,482. If the convertible debt had been converted into common stock, it would have increased the weighted average common shares outstanding by 16,905 shares. TJX, Inc., has outstanding stock options that, if exercised, would increase the weighted average of common shares outstanding by 6,935 shares. Compute basic and diluted earnings per share for Year 4, showing supporting computations