E12.1. Leveraging Equations (Easy)

The following information is from reformulated financial statements (in millions):

2012 2011

Operating assets $2,700 $2,000

Short-term debt securities 100 400

Operating liabilities (300) (100)

Bonds payable (1,300) (1,400)

Book value 1,200 $ 900

Sales 2,100

Operating expenses (1,677)

Interest revenue 27

Interest expense (137)

Tax expense (tax rate = 34%) (106)

Earnings (net) $ 207

a. (1) Calculate the dividends, net of capital contributions, for 2012.

(2) Calculate ROCE for 2012; use average book value in the denominator.

(3) Calculate RNOA for 2012; use the average net operating assets in the denominator.

(4) Supply the numbers for the formula ROCE = PM ATO + [Financial leverage (RNOA Borrowing cost)]

b. The firms short-term borrowing rate is 4.5 percent after tax. Supply the numbers for the formula RNOA = ROOA + (OLLEV OLSPREAD)

c. Repeat the exercise in part (a) using the following information (in millions):

2012 2011

Operating assets $2,700 $2,000

Short-term debt securities 1,000 800

Operating liabilities (300) (100)

Book value 3,400 $2,700

Sales 2,100

Operating expenses (1,677)

Interest revenue 90

Tax expense (tax rate = 34%) (174)

Earnings $ 339