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Question #2. (15 marks) OA 10,800 OL 1,800 NonOA 1,600 NonOL 600 EQ 10,000 Total 12,400 Total 12,400 Required: (i) Compute B/S items NOA and

Question #2.

(15 marks)

OA 10,800 OL 1,800

NonOA 1,600 NonOL 600

EQ 10,000

Total 12,400 Total 12,400

Required:

(i)

Compute B/S items NOA and NNO.

NOA 10800-1800=9000 NNO 600-1600=-1000

EQ 10000

Total 9000 Total 9000

If NNO is negative, what does that mean? It means it is a net financial asset instead of being a net financial obligation

(ii)

If RNOA =10% and NNEP =5%, construct the underlying I/S

NOPAT 9000*10%=900

NNE -1000*5%=-50

NI 900-(-50)=950

Compute ROE

(iii)

Verify that ROE=RNOA+(RNOA-NNEP)*FLEV. FLEV = NNO/EQ

Compute RNOA as a weighted average of ROE and NNEP

Compute ROE as a weighted average of RNOA and NNEP

Only need question(iii). Thanks.

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