a) Under what circumstances do abnormal earnings (AE) equal stock abnormal return (SAR)? What is the connection between the two measures of abnormal performance?

b) Wakuseimugen’s condensed Statement of Financial Position is shown below, in JPY (¥) million. The cost of equity capital is 10%. The effective tax rate is 20%.

All assets are operating assets. The current liabilities are operating liabilities.

The non-current liabilities are financial liabilities, carrying an interest rate of 6%.

Year ended 31 December 2020	¥ million
Non-current assets	2,495
Current assets	356
Current liabilities	285
Non-current liabilities	962
Common shareholders’ equity	1,604

Wakuseimugen reported net income and comprehensive income of ¥250 million for 2020. Its 2020 return on sales was 14%.

In this question, ratios between a flow variable and a stock variable need to be calculated using ending balances for the stock variable.

(i) Perform a traditional multiplicative decomposition of Wakuseimugen’s return on common equity and interpret the results.

(ii) Perform an additive “alternative” decomposition of Wakuseimugen’s return on common equity, and interpret the results. Determine whether financial leverage benefits Wakuseimugen’s shareholders.

(iii) Decompose the return on net operating assets calculated in part (ii) into a profit margin and an operating asset turnover. Compare this with the return on assets decomposition in part (i) and explain the differences.