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use the Incomes Statement and EOY Balance Sheet line items in the table below for questions...

use the Incomes Statement and EOY Balance Sheet line items in the table below for questions 1-6:

(in USD millions) December-16 December-17
Sales 8000 10000
Operating Income 1600 2000
Net Income 600 800
Cash 1100 1300
Marketable Securities 100 300
Accounts Payable 600 800
Accounts Receivable 800 900
Current portion of LT Debt 300 100
Inventory 500 600
Gross PPE 3000 3300
Net PPE 2500 2700
Long Term Debt 2100 2400
Interest Expense 800 900
Dividends 150 250
Shares Issued (Repurchased) (50) (50)

1. Use End of Year (EOY) balances to compare fiscal year 2017 to fiscal year 2016.According to Dupont’s ROE, which of the following statements is most likely FALSE?

a. The company’s capital structure had more debt in 2017 as compared to 2016

b. The company had more sales per dollar of total assets in 2017 as compared to 2016

c. The company had the same operating margin in 2017 as compared to 2016

d. The company had a better tax burden ratio in 2017 as compared to 2016

e. The company had a worse interest burden ratio in 2017 as compared to 2016

Solutions

Expert Solution

a. Total debt in 2016 = 2100 + 300 = 2400. Total debt in 2017 = 2400+100 = 2600. So, capital structure had more debt in 2017 when compared to 2016 (TRUE STATEMENT)

b. Total Assets in 2016 = Cash + Merketable securities + Accounts rec. + Inventory + Net PPE = 1100+100+800+500+2500 = 5000. Sales per dollar of assets in 2016 = 8000/5000 = 1.6

Total Assets in 2017 = 1300+300+900+600+2700 =5800. Sales per dollar of assets in 2017 = 10000/5800 = 1.72

So, there was more sales per dollar assets in 2017 than in 2016 (TRUE STATEMENT)

c. Operating margin in 2016 = 1600/8000 = 0.2. Operating margin in 2017 = 2000/10000 = 0.2. So company had the same operating margin in 2017 and 2016 (TRUE STATEMENT)

2016 2017
EBIT 1600 2000
Interest expense 800 900
EBT 800 1100
Taxes 200 300
Net Income 600 800
Tax burden (Net Income/EBT) 0.75 0.727273
Interest Burden (EBT/EBIT) 0.5 0.55

d. Tax burden was lower in 2017. Hence the company had a better tax burden ratio in 2017 (TRUE STATEMENT)

e. The company had a higher interest burden ratio in 2017 which indicates that it was not the worse . The lower the interest burdent ratio, the worse it is.(FALSE STATEMENT)

jeff jeffy answered 2 years ago
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