E12.5. Explaining a Change in Profitability (Medium) Consider the following financial information: Summary Balance Sheets at December 31 2009 2008 2007 Cash $ 100 $ 100 $ 120 Short-term investments 300 300 330 Accounts receivable 900 1,000 1,250 Inventory 2,000 1,900 1,850 Property, plant, and equipment (net of accumulated depreciation) 8.200 9,000 10,500 Total assets 11,500 12,300 14,050 Accrued liabilities 600 500 550 Accounts payable 900 1,000 1,100 Bank loan Bands payable 0 0 3,210 4,300 4,300 1,000 Deferred taxes 490 500 600 Total abilities 5290 6,300 6,460 Preferred stock (8%) 1,000 1,000 1,000 Common stock 1,400 2,000 2,000 Retained earnings 2,810 3,000 4,990 Owners' equity $5,210 36,000 $7,590 Summary Income Statements Sales Cost of goods sold Selling and administration Interest income Restructuring charges Interest expense Earnings before taxes and extraordinary items Tax expense Earnings before extraordinary items Gain due to retirement of bonds, net of taxes Net income 2009 2008 $ 22,000 (13,000) (8,000) (190) $ 24,000 (13,100) (8,250) 0 24 25 (430) (430) 404 2,245 (134) (675) 270 1,570 0 100 270 1,670 Prepare a succinct analysis that explains the change in ROCE from 2008 to 2009. The mac- ginal tax rate is 34 percent, and dividends paid on preferred stock cannot be deducted for tax purposes.