Return on equity measures a company’s profitability by calculating how much profit a company generates with the money shareholders have invested. It is important to consider ROE and not just net income in dollar term because it helps for making comparisons among different investment amounts.
ROE uses shareholder’s investments to measure the effectiveness and profitability of the company. RNOA uses the total asset base invested by both creditors and shareholders to measure the effectiveness and profitability of the company. The portion of a company’s income that is resulting from activities not related to its core operations is called non-operating income. Non-operating income would include such items as dividend income, profits or losses from investments, and other non-operating revenues and expenses. The non-operating portion of ROE determines the amount to which a company uses debt to increase its return on equity. Return on equity will increase if return earned on assets financed by the debt is greater than interest rate on debt.
The amount of tax paid on an additional dollar income is known as marginal tax rate. Increase in income, increases ta x rate. A tax shield is reduction in income taxes that results from taking an allowance from taxable income. It is a way to save cash flows and it increase value of the business and important feature of business valuation. It is also saves taxes by having tax-deductible non-operating expenses.
Net operating assets
NOPAT = NOPBT – [ tax expense + (pretax net non-operating expense * tax rate)] NOPAT for 2009 = 834 – [255 + [ (138) * 0.385]
= $ 525.87
NOPAT for 2008 = 779 – [247 + [ (131) * 0.385]
= $ 481.57
Tax shield from non-operating activities in fiscal...
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