QUESTION: Referring to the CFM Majestic financial statements, did ROE rise or fa
ID: 2622207 • Letter: Q
Question
QUESTION: Referring to the CFM Majestic financial statements, did ROE rise or fall from Year 1 to Year 2?
Balance Sheet
CFM Majestic Inc.
Years 1 & 2 ($000,000s)
Year 1
Year 2
Cash
29.2
21.2
A/R
108.2
122.6
Inventory
74.0
79.7
Total Current Assets
211.4
223.5
Fixed Assets, Net
81.6
94.1
Goodwill
159.6
184.5
Total Assets
452.6
502.1
Accounts Payable
46.4
50.5
Short-term Debt
23.0
27.0
Total Current Liabilities
69.4
77.5
Long Term Debt
125.8
128.5
Deferred income taxes
14.0
18.6
Equity
Share Capital
148.9
151.8
Retained Earnings
94.5
125.7
Owners' Equity
243.4
277.5
Total Liabilities & Equity
452.6
502.1
Income Statement
CFM Majestic Inc.
Years 1 & 2 ($000,000s)
Year 1
Year 2
Sales
381.9
416.3
COGS
244.9
278.9
SG&A
59.7
63.8
Depreciation
13.8
15.4
R & D
5.3
4.3
EBIT
58.2
53.9
Interest Expense
7.3
7.9
Earnings before Income Tax
50.9
46.0
Income Taxes
17.3
14.8
Net Income
33.6
31.2
Year 1
Year 2
Cash
29.2
21.2
A/R
108.2
122.6
Inventory
74.0
79.7
Total Current Assets
211.4
223.5
Fixed Assets, Net
81.6
94.1
Goodwill
159.6
184.5
Total Assets
452.6
502.1
Accounts Payable
46.4
50.5
Short-term Debt
23.0
27.0
Total Current Liabilities
69.4
77.5
Long Term Debt
125.8
128.5
Deferred income taxes
14.0
18.6
Equity
Share Capital
148.9
151.8
Retained Earnings
94.5
125.7
Owners' Equity
243.4
277.5
Total Liabilities & Equity
452.6
502.1
Explanation / Answer
ROE(1) = Net income(1) / Shareholder's equity(1) = 33.6 / 243.4 = 0.138
ROE(2) = Net income(2) / Shareholder's equity(1)ROE(2) =31.2 / 277.5 = 0.112
ROE(1) > ROE(2)
ROE decreased from year 1 to year 2
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