National University of Ireland, Dublin Master of Science (Finance) Intake 15 Module: Strategic Finance Submitted by: Win Lwin Student Number: 12254491 Lecturer: Mr. Soh Cheong Hian Submission Date: 17 May 2013 Word Count: 590

Question 1:
Exhibit 1 Company A Company B Company C 14.28 13 15.24 15.79 14.28 29

Return on assets (%) Return on Equity (%)

Referring to Exhibit 1, the rationale behind using the net operating profit after tax (NOPAT) for the calculation of return on assets and return on equity instead of using the net income is that a company’s profits are isolated by removing non operating or nonrecurring items from the reported earnings. Hence, by eliminating the interest expense in the profit calculation, the operating profitability is not distorted by differences in the capital structure of a company (Kabajeh, AL Nu’aimat & Dahmash, 2012). Company A and Company B does not use debt financing, using NOPAT or net income does not affect the return on assets and return on equity. However, Company C uses debt financing so using NOPAT in the calculations is more effective and accurate.
Exhibit 2 Invested Capital Company A Company B Company C Assets Inventory Accounts Payable Operating Working Capital Net PP&E Invested Capital Equity Investment Total Funds Invested 125 (50) 75 400 475 475 125 (50) 75 400 475 50 525 125 (50) 75 400 475 475

Reconciliation of total funds invested Company A Company B Company C Interest bearing debt 200 Common Stock 475 525 275 Retained Earnings Total funds invested 475 525 475

Exhibit 3 NOPAT Operating profit Operating tax NOPAT Company A Company B Company C 100 100 100 (25) (25) (20) 75 75 80

Exhibit 4 Return on Invested Capital NOPAT Invested Capital Return on Invested Capital (%) Company A Company B Company C 75 75 80 475 475 475 15.79 15.79 16.84

Operating performance wise, based on the three ratios Company