Question

What is the company's financial leverage or FLEV ratio (to three decimal places) if it has an RNOA of 11.1%, a ROCE of 15.3% and its net borrowing cost is 4.2%?

Answer 1

The information provided in the question are as fallows:

RNOA = Return on Net Operating Assets = 11.1%

ROCE = Return on Common Equity = 15.3%

Net Borrowing Cost = 4.2%

Find Out Company's Financial Leverage or FLEV Ratio?

ROCE = RNOA + [ FLEV * ( RNOA - Net borrowing cost) ] it's simplify for FLEV Ratio.

Financial Leverage or FLEV Ratio = [ROCE - RNOA]/ [RNOA - Net Borrowing Cost]

using the values are provided in the question:

FLEV Ratio = [15.3% - 11.1%] / [11.1% - 4.2%]

= 4.2% / 6.9%

= 0.6086 or 0.609

The Company's Financial Leverage or FLEV Ratio is 0.609%