Question

Below are the last three years’ financial statements of Sentec Inc., a distributor of electrical fixtures.
a. Compute Sentec Inc.’s working capital requirement (WCR) and prepare its managerial balance sheets at Year-end 1, Year-end 2, and Year-end 3.
b. Compute Sentec’s operating margin, invested capital turnover, return on capital employed, financial cost ratio, financial structure ratio, and the tax effect in Year 1, Year 2, and Year 3. What is the relationship between these ratios and Sentec’s return on equity (ROE) over the three-year period?
c. What accounts for the change in the firm’s ROE over the three-year period?
d. In Year 3, firms in the same business sector as Sentec Inc. had an average collection period of thirty days, an average payment period of thirty-three days, and an inventory turnover of eight days. Suppose Sentec Inc. had managed its operating cycle like the average firm in the sector. What would its WCR, managerial balance sheet, operating margin, invested capital turnover, return on capital employed, financial cost ratio, financial structure ratio, and the tax effect have been in Year 3? Its ROE? Assume a ratio of interest expense to earnings before interest and tax of 4 percent, and an effective tax rate of 40 percent.


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  • CreatedMarch 27, 2015
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