Question 3

A firm has financial assets invested in short-term government bonds but has no financial obligations.

(a) Suppose return on net operating assets (RNOA) exceeds return on common equity

(ROCE). Explain how this can be due to the financial assets.

(b) Suppose now that ROCE exceeds RNOA. Explain how this can happen to this firm.

(c) Apple Inc. has no financial obligations but had $68.8 billion of financial assets in March

2011. Does it belong in case (a) or (b)?

the question is posted in full

A firm has financial assets invested in short-term government bonds but has no financial obligations. (a) Suppose return on net operating assets ("RNOA") exceeds return on common equity ("ROCE"). Explain how this can be due to the financial assets. (b) Suppose now that ROCE exceeds RNOA. Explain how this can happen to this firm. (c) Apple Inc. has no financial obligations but had $68.8 billion of financial assets in March 2011. Does it belong in case (a) or (b)? (Source: Penman C12.13) obligations. (a) Suppose return on net operating assets ("RNOA") exceeds return on common equity ("ROCE"). Explain how this can be due to the financial assets. (b) Suppose now that ROCE exceeds RNOA. Explain how this can happen to this firm. (c) Apple Inc. has no financial obligations but had $68.8 billion of financial assets in March 2011. Does it belong in case (a) or (b)? (Source: Penman C12.13)