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A firm earns a profit margin of 6 percent on sales of $600 million and employs net operating assets of $200 million. It considers adding
A firm earns a profit margin of 6 percent on sales of $600 million and employs net operating assets of $200 million. It considers adding another product line that will earn a 4 percent profit margin with an asset turnover of 4. Judging solely from the information given, what would be the effect on the firm's return on net operating assets (RNOA) after adding the new product line? RNOA will slightly increase. RNOA will significantly increase. RNOA will remain unchanged. RNOA will slightly decrease. None of the above statements is correct. O ABC Corp. has a return on common equity of 17%. It has a financial leverage of 60% and an after-tax net borrowing cost of 5% on $150 million of net financial obligation. The firm is considering repurchasing $50 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost. What will be the firm's return on common equity after this transaction if the same level of operating profitability is maintained? 12.5% 17% 20% 24.5% None of the above
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