Below Are Selected Ratios for Widget Corporation and Tools Inc

question 56

Essay

Below are selected ratios for Widget Corporation and Tools Inc. Use this information to answer the following questions. $\begin{array}{c}\begin{array}{ll}\\\text { 1. } & \text { Net operating asset turnover } \\\text { 2. } & \text { Inventory turnover } \\\text { 3. } & \text { Accounts receivable turnover } \\\text { 4. } & \text { Fixed assets turnover } \\\text { 5. } & \text { Net operating profit margin } \\\text { 6. } & \text { Assets-to-equity } \\\text { 7. } & \text { EBIT/revenues } \\\text { 8. } & \text { Gross margin } \\\text { 9. } & \text { Income tax rate }\end{array}\begin{array}{rr}\text { Widget Corp.}&\text { Tools, Inc. }\\2.0 & 2.0 \\4.6 & 4.0 \\12.0 & 12.0 \\1.8 & 2.0 \\4.5 \% & 2.9 \% \\2.10 & 3.3 \\9.9 \% & 8.6 \% \\21.1 \% & 19.8 \% \\35 \% & 35 \% \end{array}\end{array}$


a. Which company has a higher return on equity?
b. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)?
c. Which company has better operating performance (that is, ignoring capital structure).

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