normalized earnings question- ss7 net, management, statements, equipment

Dapper425

An analyst finds return-on-equity (ROE) a good measure of management performance and wants to compare two firms: Firm A and Firm B. Firm A reports net income of $3.2 million and has a ROE of 18. Firm B reports income of $16 million and has an ROE of 16. A review of the notes to the financial statements for Firm A, shows that the earnings include a loss from smelting operations of $400,000 and that the firm has exited this business. In addition, the firm sold the smelting equipment and had a gain on the sale of $300,000. A similar review of the notes for Firm B discloses that the $16 million in net income includes $2.6 million gain on the sale of no longer needed office property. Assume that the tax rate for both firms is 36%, and that the notes describe pre-tax amounts. What would be the “normalized” ROE for Firm A and for Firm B, respectively?

kamara5

How do you normalize accounts receivable than have been sold? My brain keeps telling me that its two asset accounts (hence no difference) but I know this is wrong.
Also say you want to consolidate an operating lease and you have lease payments of $100 for the next 5 years with i=10%. Is it just a simple NPV of the amount you capitalize? Then what are the effects on Net income assuming you have straight line depreciation?
Thanks for you help.

Penny-wenny

Reminder to Ali: don’t forget to take changes net of tax

defour44

good, good, and good. well done team.

noel

Normalized ROE
Firm A - 18.36%
Firm B - 14.34%

cfa10yrplan

I’ll take a break from deriv’s and take a stab.
I get A’s new Roe at 18.4% B’s at 14.3%

cross-ied

FirmA incresed from 18 to 18.36080329
FirmB decreased from 16 to 14.336
?