Question

The following numbers were calculated from the financial statements for a firm for 2012 and 2011...

The following numbers were calculated from the financial statements for a firm for 2012 and 2011

2012

2011

Return on common equity (ROCE

15.2%

13.3%

Return on net operating assets (RNOA)

11.28%

12.75%

Sales (millions)

$16,754

$11,035

Average net operating assets (millions)

$ 6,981

$ 4,414

Average net financial obligations (millions)

$ 2,225

$ 241

Average common equity (millions)

$ 4,756

$ 4,173

Explain to what extent the change in common equity from 2011 to 2012 is due to sales growth, net assets required to support sales, and borrowing

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Answer #1

Growth in equity =(4756-4173)/4173= 13.97%

Frowth in equity is die to increase is sales as sales will increase, revenue will increase that leads to increase in net profit which will in turn increases the retained earning of distributed among share holders .In both the case equity will increase because retained earnings comes under equity un balance sheet and if it will be distributed among share holder then their satisfaction will increase and hence investment in equities will increase.

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