In 2005 IBM had a return on equity of 26.7 percent, whereas Hewlett-Packard's return was only 6.4 percent. Use the decomposed ROI framework to provide possible reasons for this difference based on the data below:

IBM

HP

NOPAT/Sales

9.0%

2.7%

Sales/Net Assets

2.16

2.73

Effective After-Tax Interest Rate

2.4%

1.1%

Net Financial Leverage

0.42

-0.16

2. In a period of rising prices, Explain how would the following ratios be affected by the accounting decision to select LIFO, rather than FIFO, for inventory valuation?

* Gross Margin
* Current Ratio
* Asset Turnover
* Debt-to-equity ratio
* Average tax rate