In 2010, firms in the same business sector as the company had an average collect
ID: 2750711 • Letter: I
Question
In 2010, firms in the same business sector as the company had an average collection period of thirty days, an average payment period of 33 days and an inventory turnover of eight. Suppose the company operated its operating cycle like average firm in the sector. On December 31, 2010, What would its WCR, managerial balance sheet, operating margin, IC turnover, ROCE, financial cost ratio, its tax effect and ROE be?(Assume a ratio of interest expense to EBIT to 4% and an effective tax rate of 40%)
2008 2009 2010 Cash 600 350 300 Accounts Receivable 2.730 3.100 4.200 Inventories 2.800 3.200 4.300 Prepaid Expenses - - - Net Fixed Assets 1.200 1.300 1.450 Total Assets 7.330 7.950 10.250 Short-term Debt 300 500 1.900 Accounts Payable 1.400 1.600 2.050 Accrued Expenses 200 260 350 Long-term Debt 1.300 1.200 1.100 Owners' Equity 4.130 4.390 4.850 Total Liabilities & OE 7.330 7.950 10.250 Net Sales 22.100 24.300 31.600 COGS 17.600 19.300 25.100 SG&A 3.750 4.000 5.000 Depreciation Expense 100 100 150 EBIT 650 900 1.350 Net Interest Expense 110 130 260 EBT 540 770 1.090 Tax Expense 220 310 430 EAT 320 460 660 Dividends 180 200 200Explanation / Answer
Answer:
The working capital requirement (WCR) can be calculated by this formula:
In 2010:
WCR = Invested capital – cash – net fixed assets
WCR = $10,250 - $300 - $1450 = $8500
Managerial Balance Sheet
Dec 31 2008
Dec 31 2009
Dec 31 2010
Invested capital
Cash
600
350
300
Working Capital Requirement
$7330-$600-$1200 = $5530
$7950-$350-$1300 = $6300
8500
Net fixed assets
$1200
$1300
$1450
Total invested capital
$7330
$7950
$10,250
Capital Employed
Short term debt
300
500
1900
Long term financing:
Long term debt
1300
1200
1100
Equity
4130
4390
4850
Total capital employed
$5730
$6090
$7850
Now to calculate Invested Capital (IC) turnover for the Year 2010 we have to use this formula:
IC turnover = sales / invested capital
Sales for 2010 = $31600 and Invested capital = $10,250
Therefore,
IC turnover = $31600 / $10250 = 3.083
Return on capital Employed = EBIT / capital employed
ROCE = $1350 / $7850 = 0.1719 or 17.2%
And Return on Equity = RoE = EAT / Total equity = $660 / $10250 = 0.0643
ROE = 6.43%
Dec 31 2008
Dec 31 2009
Dec 31 2010
Invested capital
Cash
600
350
300
Working Capital Requirement
$7330-$600-$1200 = $5530
$7950-$350-$1300 = $6300
8500
Net fixed assets
$1200
$1300
$1450
Total invested capital
$7330
$7950
$10,250
Capital Employed
Short term debt
300
500
1900
Long term financing:
Long term debt
1300
1200
1100
Equity
4130
4390
4850
Total capital employed
$5730
$6090
$7850
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