Question

       ABC Corp

2014 Income Statement

($ in millions)

                                    Net sales                                             $9,610

                                    Less: Cost of goods sold                     6,310

                                    Less: Depreciation                              1,370

                                    Earnings before interest and taxes      1,930

                                    Less: Interest paid                                    630

                                    Taxable Income                                  $1,300

                                    Less: Taxes                                              455

                                    Net income                                         $   845

                                    Dividends paid to shareholders           $ 275

ABC COrp

2013 and 2014 Balance Sheets

($ in millions)

                                         2018       2019                                                 2018          2019

Cash                            $     310 $    405        Accounts payable       $ 2,720    $   2,570

Accounts rec.                 2,640      3,055        Notes payable                    100                0

Inventory                        3,275     3,850        Total Curr. Liab.         $ 2,820     $ 2,570

Total Curr. Assets       $ 6,225 $ 7,310        Long-term debt               7,875         8,100

Net fixed assets          10,960   10,670        Common stock               5,000         5,250

                                                                        Retained earnings           1,490         2,060

Total assets                 $17,185   $17,980       Total liab.& equity     $17,185     $17,980

Q. What is the change in Net Working Capital from 2013 to 2014? What is the amount of Net Capital Spending for 2014? What is the amount of Operating Cash Flow for 2014? What is the Cash Flow to the Creditors for 2014? Calculate the (a) ROA (Return on Assets) and (b) Net Profit Margin Ratios for 2014. Calculate the (a) Total Asset Turnover and (b) Equity Multiplier Ratio for 2014. Using the DuPont Approach and the ratios calculated above, demonstrate the calculation of the Return on Equity (ROE) for 2014?

Answer 1

Answer:

Net Working Capital = Current Assets – Current Liabilities

Net Working Capital for 2013 = $6,225 - $2,820
Net Working Capital for 2013 = $3,405

Net Working Capital for 2014 = $7,310 - $2,570
Net Working Capital for 2014 = $4,740

Change in Net Working Capital = $4,740 - $3,405
Change in Net Working Capital = $1,335

Net Capital Spending = Ending Net FA – Beginning Net FA + Depreciation
Net Capital Spending = $10,670 - $10,960 + $1,370
Net Capital Spending = $1,080

Operating Cash Flow = EBIT + Depreciation – Taxes
Operating Cash Flow = $1,930 + $1,370 - $455
Operating Cash Flow = $2,845

Cash Flow to Creditors = Interest Paid – Net New Borrowing
Cash Flow to Creditors = $630 – ($8,100 - $7,875)
Cash Flow to Creditors = $405

Return on Assets (ROA) = Net Income / Total Assets * 100
Return on Assets (ROA) = $845 / $17,980 * 100
Return on Assets (ROA) = 4.70%

Net Profit Margin = Net Income / Net Sales * 100
Net Profit Margin = $845 / $9,610 * 100
Net Profit Margin = 8.79%

Total Assets Turnover = Sales / Total Assets
Total Assets Turnover = $9,610 / $17,980
Total Assets Turnover = 0.53 times

Debt – Equity Ratio = Total Debt / Total Equity
Total Debt = $2,570 + $8,100 = $10,670
Total Equity = $5,250 + $2,060 = $7,310

Debt – Equity Ratio = $10,670 / $7,310
Debt – Equity Ratio = 1.46

Equity Multiplier = 1 + Debt – Equity Ratio
Equity Multiplier = 1 + 1.46
Equity Multiplier = 2.46

Return on Equity (ROE) = Net Profit Margin * Total Assets Turnover * Equity Multiplier
Return on Equity (ROE) = 8.79% * 0.53 * 2.46
Return on Equity (ROE) = 11.46%