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Consider two companies, Alpha and Omega. For Alpha, suppose that you collected the following financial information: Operating return on assets = 10.5%; Total assets =
Consider two companies, Alpha and Omega. For Alpha, suppose that you collected the following financial information: Operating return on assets = 10.5%; Total assets = $9,200,000; Assume cost of capital = 10%. (Note: Total assets here is proxy for total capital employed or invested capital) For Omega, suppose that you have obtained the following information: capital employed of $5,000,000, representing funds raised from both debt and equity in equal proportion. Further, assume that cost of debt is 8% and the cost of equity is 16%. Assume the firm earns 17% operating income on its investments. According to the economic value-added methodology, which of the following statements is true? A Alpha created more value for the shareholders. Omega created more value for the shareholders. O c. Alpha and Omega created the same value. It is not possible to tell. B. D
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