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Internal Management Tools, RNOA, NOPAT Sales, and Stress Tests

1. What is an example of return on invested capital being used as an internal management tool?
2. What is an example of interest expense being ignored when computing return on net operating assets (RNOA)?
3. What is the relation between return on net operating assets and sales? Consider both NOPAT sales and sales to net operating assets in your response.
4. Describe the process and purpose of stress tests for banks in the US.

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1. What is an example of return on invested capital being used as an internal management tool?
First, return on invested capital measures an organization's efficiency as regards the allocation of capital to different investment choices. In other words ROIC tells how well a business uses its capital to generate returns. The higher the ROIC, the more efficient the company is. As an internal management tool, the ROIC can be compared to the company's WACC to measure how effective it used capital available for investment. However, by itself, ROIC is not an appropriate internal management tool as it does not specify where the returns were generated from.

2. What is an example of interest expense ...

Solution Summary

Various terms such as the return on invested capital, interest expense, return on net operating assets, and net operating assets and sales are explained in detail.

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