Question

The following numbers were calculated from financial statement for a firm for 2006 and 2005:

Year: 2006 2005

ROCE: 15.2% 13.3%

RNOA: 11.28% 12.75%

NBC: 2.9% 3.2%

Average net obligation: $2225 $241

Average common equity:4756 4173

a) how much of change in ROCE is due to operating activities and how much is due to finance activity?

b) how much of change in ROCE from financing activities is due to a change in financial leverage, and how much is due to a change in spread over net borrowing costs?

Answer 1

Part a)
Year:			2006	2005
ROCE:			0.152	0.133
RNOA:			0.1128	0.1275
NBC:			0.029	0.032
Average net obligation(A)			2225	241
Average Common equity(B)			4756	4173
Net operating Assets(A+B)			6981	4414
ROCE in Amount			1061.112	587.062
RNOA in Amount			787.4568	562.785
NBC in Amount			64.525	7.712
					Change	Weights of % change
Part 1 :- (Net Operating Assets/ Common Equity)*RNOA			16.56%	13.49%	3.07%	161.72
Part 2: - (Net Financing Debt /Common Equity)*Net Borrowing Rate			1.36%	0.18%	-1.17%	-61.72
ROCE = Part 1 - Part 2			15.20%	13.30%	1.90%	100.00
Change attributable to operating Activity = 161.72%
Change attributable to Financing Activity = (61.72%)
Part (b)
Financing Leverage (FLEV)= Net Financing Debt /Common Equity
			2006	2005	Change
			0.47	0.06	0.41
Change attributable to FLEV = (41/61.72)*100 = 66.43%
Change attributable to Spread = 100 - 66.43 = 33.57%