Use the financial statements on the next page to answer 10. Decompose the ROE fo
ID: 2755952 • Letter: U
Question
Use the financial statements on the next page to answer
10. Decompose the ROE for the two years into:
Tax Burden, Interest Burden, Margin, Turnover, Leverage, Compound Leverage and ROA
Write a short note on the financial health of the company.
Income Statement
2012
2013
2014
Sales Revenues
130,000
150,000
COGS (including Depreciation)
85,800
105,000
Depreciation
20,000
25,000
S&A Expenses
15,000
18,000
Operating Income
29,200
27,000
Interest Expense
12,000
15,000
Taxable Income
17,200
12,000
Income Tax (40%)
6,880
4,800
Net Income
10,320
7,200
Balance Sheet
2007
2008
2009
Cash & MS
20,000
30,000
28,000
Accounts Receivable
40,000
50,000
60,000
Inventories
75,000
80,000
100,000
Net PPE
120,000
140,000
160,000
Total Assets
255,000
300,000
348,000
Liabilities
Accounts Payable
50,000
60,000
85,000
Short-term Debt
45,000
72,000
85,000
LT Debt (8% Bonds)
75,000
74,000
80,000
Total Liabilities
170,000
206,000
250,000
Shareholders Equity
85,000
94,000
98,000
Price per share
$ 85.00
$ 77.00
No of shares
10,000
10,000
10,000
Dividends Paid
1,320
3,200
Income Statement
2012
2013
2014
Sales Revenues
130,000
150,000
COGS (including Depreciation)
85,800
105,000
Depreciation
20,000
25,000
S&A Expenses
15,000
18,000
Operating Income
29,200
27,000
Interest Expense
12,000
15,000
Taxable Income
17,200
12,000
Income Tax (40%)
6,880
4,800
Net Income
10,320
7,200
Balance Sheet
2007
2008
2009
Cash & MS
20,000
30,000
28,000
Accounts Receivable
40,000
50,000
60,000
Inventories
75,000
80,000
100,000
Net PPE
120,000
140,000
160,000
Total Assets
255,000
300,000
348,000
Liabilities
Accounts Payable
50,000
60,000
85,000
Short-term Debt
45,000
72,000
85,000
LT Debt (8% Bonds)
75,000
74,000
80,000
Total Liabilities
170,000
206,000
250,000
Shareholders Equity
85,000
94,000
98,000
Price per share
$ 85.00
$ 77.00
No of shares
10,000
10,000
10,000
Dividends Paid
1,320
3,200
Explanation / Answer
ROE = Tax burden x Interest burden x Margin x Turnover x Leverage
ROE = [Net Profit / Pre tax Profit] x [Pre tax Profit / EBIT] x [ EBIT / Sales] x [Sales / Assets] x [Assets / Equity]
2013:
= [10320 / 17200] x [17200 / 29200] x [29200 / 130000] x [130000 / 300000] x [300000 / 94000]
= 10.98%
2014:
= [7200 / 12000] x [12000 / 27000] x [27000 / 150000] x [150000 / 348000] x [348000 / 98000]
= 7.35%
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