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ROA

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Based on the information shown below for Pegasus, Inc.:

A. Compute the reported ROA for each portfolio component for 2003 and 2004.
B. Compute the mark to market ROA for each portfolio component.
C. Explain what the data set forth in A and B suggest about investment performance for 2004 compared with 2003 and which is a method of determining ROA is a better measure of the performance of Pegasus's portfolios.

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ROA is an Indicator of profitability. Determined by dividing net income for the past 12 months by total average assets. Result is shown as a percentage. ROA can be decomposed into return on sales (net income/sales) multiplied by asset utilization (sales/assets).
1
Fixed Maturities ROA for the year 2003 is calculated by dividing the Interest income and the realized gains (losses) by the cost of the fixed maturities.
(2,244 +20) 2,264/ 37,984 x 100 = 5.96%
Fixed Maturities ROA for the year 2004 is calculated by dividing the Interest income and the realized gains (losses) by the cost of the fixed maturities.
(2,115- 76) 2,039/ 29582 x 100 = 6.89%

Equity ROA for the year 2003 is calculated by dividing the dividend income and the realized gains by the cost of the equity.
(78+22) 100/1450 x 100 = 6.9%
Equity ROA for the year 2004 is calculated by dividing the dividend income and the ...

Solution Summary

ROA is discussed.

$2.19
Similar Posting

Show and interpret the disaggregation of ROA Dupont Formula & Financing Cash Requirements

Please see attachment for detailed info on 2 questions (in better format):

The DuPont Analysis method is based on a series of relationships among financial ratios:
Net Profit Margin x Total Asset Turnover = Return on Assets
and
Net Profit Margin x Total Asset Turnover x Leverage Ratio = Return on Equity

Using data from www.att.com and www.vonage.com financial statements, compare the profit margin, asset turnover, leverage ratio (i.e. assets/equity), ROA, and ROE. Please present the data in a similar format as shown in the example below.

Discuss what each of these metrics tells you about each company's performance.
Example

ROA = Profit Margin x Asset Turnover

ROA = net income x revenue
revenue total assets

ROA = 15,000 x 250,000
250,000 125,000

ROA = 0.060 x 2.00 = 0.120

ROA = 6.0% x 2.00 = 12.0%

ROE = ROA x Leverage Ratio

ROE = Profit Margin x Asset Turnover x Leverage Ratio

ROE = net income x revenue x total assets
revenue total assets total equity

ROE = 15,000 x 250,000 x 125,000
250,000 125,000 45,000

ROE = 0.060 x 2.00 x 2.78 = 0.333

ROE = 6.0% x 2.00 x 2.78 = 33.3%

Question 2

Apply the External Financing model process to www.att.com.

Take the company's most recent financial statements and project a 10% increase in sales.

Determine whether AT&T will have a capital surplus (i.e. spontaneous financing will be enough to pay for the required assets), or whether external financing would be needed to support the projected increase in sales.

Here's an example:
INCOME STATEMENT 2009 change projected

Total Revenue 250,000 + 10% 275,000
Net Income 15,000 + 10% 16,500
dividends paid 5,000 + 10% 5,500
addition to retained earnings 10,000 + 10% 11,000

(note: Net Income - Dividends Paid = Addition to Retained Earnings)

BALANCE SHEET 2009 change projected

TOTAL ASSETS 125,000 + 10% 137,500

Current Liabilities 10,000 + 10% 11,000
Non-Current Liabilities 70,000 none 70,000

addition to
Total Equity 45,000 retained earnings 56,000

TOTAL LIABILITIES + EQUITY 125,000 137,000

CAPITAL SURPLUS or
EXTERNAL FINANCING NEEDED -500

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