You Are Comparing the Return on Common Equity (ROCE) and Its

question 40

Essay

You are comparing the Return on Common Equity (ROCE) and its components (net operating profit margin, net operating asset turnover and leverage) of two companies in the same industry, ABC Corp and XYZ Corporation. Explain how each of the following will affect of ROCE and its components of ABC relative to XYZ, all other things equal.

1. ABC Corporation is 100% equity financed, whereas XYZ has a significant amount of debt financing.
2. ABC issued stock dividend during year, and XYZ did not.
3. ABC uses FIFO and XYZ uses LIFO (assuming normal economic conditions)
4. ABC sold receivables at face value at the end of the year.

---

Definitions:

Resistance

A measurement of the opposition to the flow of electric current, causing electrical energy to be converted into heat.

Apparent Power

The product of the current and voltage in an AC circuit, measured in volt-amperes, which may differ from the actual power due to phase differences.

Series RL Circuit

A type of electrical circuit that consists of a resistor (R) and an inductor (L) connected in series with each other.

Quadrature Power

Same as VARs or wattless power.