Classwork & Assignment

Table 1

A

B

$

$

Assets

74,000

140,000

PPE

54,000

110,000

Cash + AR + Inventory

20,000

30,000

Liabilities

48720

87200

Equity

?

?

Research & Development

14,600

27,000

Training Expenses

8900

10200

Sales

85400

87000

Cogs &

Operating expenses

45875

47650

Depreciation

20000

20000

EBIT

19,525

19350

Tax

30%

25%

Net income

12,167

12158

A

B

Cost of equity

9%

8%

Cost of debt

5.5%

4.5%

A =L + E

Assume Liabilities consist of 20% current liabilities and the rest is debt on which the company has to pay interest

The table above shows the financial data of three companies A,B and C. The initial investment was $65000.

Required

1. Carry out a Dupont Analysis to show what has contributed to the ROE of the company [profitability; efficiency; financial leverage]

2. Calculate the WACC of the company

3. Calculate the EVA of year A,B,C.

4. Calculate the residual income of the three companies

Solution for Company A

1 DuPont Analysis

(1) (2)

ROE = [Gross profit /Sales] x [Sales/Total assets] x [Total

assets/Equity]

(3)

1. NI/ sales = Margin = 12167 / 85,400 =0.14

{ Profitability }

2 Sales / TA = Turnover = 85,400 /74000 =1.15

3. ROI = Margin x Turnover

4. TA - Liabilities = Equity

Equity = 74000-48720 =$25,280 = 25,280

TA / Equity = 74000/25280 = 2.93 {Financial Leverage } ROE = 0.14 x 1.15 x 2.93 = 0.47

What contributes the most is the financial leverage.

[Efficiency]

2. Calculation of WACC

WACC = Wd x r d (1-T) + We x re

Wd = D /[D + E] =38976 /64256 =0.61

D = L CL = 48720- (0.20 x 48720) = 38,976 D + E = 38,976 + 25280 = 64,256

We = 1- 0.61 = 0.39

WACC = [0.61 x[0.055 x (1- 0.30)] + ( 0.39x 0.09 ) WACC = 0.023 + 0.035 = 0.058

= 5.8%

3. Calculation of EVA

EVA = EBIT [1-T] [WACC x TCE] EBIT [1-T] = 19525(1- 0.30) =$13668 WACC = 5.8 %

TCE :

PPE = 54,000

R&D =14,600

E / T= 8,900

TCE = 77,500

EVA =13668 [0.058 x 77,500] = $ 9173

5. Residual Income calculation:

RI = EBIT [re x operating assets]

re rf + risk premium

Cash + AR + INV + PPE = 20,000 +54,000 = $74,000

RI = 19525 [ 74000 x 0.09] =$12,865

Classwork & Assignment Table 1 5 540.000 130.000 $ 74.000 PPE 54.000 Cash. AR Inventory 20,000 Liabilities 48720 Equity 2 87200 7 14 500 27.000 Research & Development Training Expenses 8900 30200 Sales R5400 87000 Cogs & Operating expenses Depreciation EBIT Tax Net income 45875 20000 19,525 47650 20000 19350 12.167 12158 B A 9% 5.5% Cost of equity Cost of debt ALE Assume Liabilities consist of 20% curtent liabilities and the rest is debe on which the company has to pay interest The table above shows the financial data of these companies AS and C The initial investment Required 1 Carry out a Dupont Analysis to show what has contributed to the ROE of the company profitability efficiency, financial leveral 2 Calculate the WACC of the company 3. Calculate the EVA of year ABC 4. Calculate the residual income of the three companies Solution for Company A 1 DuPont Analysis (11 12) ROE Gross profit/sales Sales/Total esixital assets/Equity! (3) 1 Ny sales Margin 12167785.400 -0.24 Profitability 2 Siles/Tumover = 85.400/4000=115 3. ROI Margin Turnover 4. TA Labilities - Equity Equity=74000-48720 =525,280 = 25,280 TAYEty 74004/25280 293 Financial average ROE = 0.14 x 1.15x2.93 0.47 What contributes the most is the financiat leverage 2. Calculation of WACC WACCxWXG DEL-CL 48720-(0.20 x 487201 - 38.976 DE 38,976 +25280 64,256 w. 1-0.61 -0.39 WACC = [0.61 [0.055 x (1-0.30)] + (0.39 0.09 ) WACC =0.023 +0.035 = 0.058 = 5,8% 3. Calculation of EVA EVA = EBIT 11:11-IWACC XTCEJ EBIT (1-7) 19525(1-0.30) =$13668 WACC = 5.8% TCE: PPE = 54,000 R&D 14,500 E/T 8.900 D+E=38,976 +25280 = 64,256 w. = 1-0.61 -0.39 WACC = [0.61 x{0.055 x (1-0.30)] + (0.39x0.09 ) WACC =0.023+0.035 = 0.058 =5.8% 3. Calculation of EVA EVA EBIT (1-1)-IWACC XTCEJ EBIT (1-7) - 19525(1-0.30) $13668 WACC - 5.8% TCE: PPE = 54,000 R&D=14,600 E/TE 8.900 TCE: 77.500 EVA-13668 -0.058% 77,500-59173 5. Residual income calculation: RIEBIT -Ir. x operating assets r. frisk premium Cash AR INVPPE 20,000 54.000 - 574.000 R= 19525- 74000 x 0.09] =512,865 Classwork & Assignment Table 1 5 540.000 130.000 $ 74.000 PPE 54.000 Cash. AR Inventory 20,000 Liabilities 48720 Equity 2 87200 7 14 500 27.000 Research & Development Training Expenses 8900 30200 Sales R5400 87000 Cogs & Operating expenses Depreciation EBIT Tax Net income 45875 20000 19,525 47650 20000 19350 12.167 12158 B A 9% 5.5% Cost of equity Cost of debt ALE Assume Liabilities consist of 20% curtent liabilities and the rest is debe on which the company has to pay interest The table above shows the financial data of these companies AS and C The initial investment Required 1 Carry out a Dupont Analysis to show what has contributed to the ROE of the company profitability efficiency, financial leveral 2 Calculate the WACC of the company 3. Calculate the EVA of year ABC 4. Calculate the residual income of the three companies Solution for Company A 1 DuPont Analysis (11 12) ROE Gross profit/sales Sales/Total esixital assets/Equity! (3) 1 Ny sales Margin 12167785.400 -0.24 Profitability 2 Siles/Tumover = 85.400/4000=115 3. ROI Margin Turnover 4. TA Labilities - Equity Equity=74000-48720 =525,280 = 25,280 TAYEty 74004/25280 293 Financial average ROE = 0.14 x 1.15x2.93 0.47 What contributes the most is the financiat leverage 2. Calculation of WACC WACCxWXG DEL-CL 48720-(0.20 x 487201 - 38.976 DE 38,976 +25280 64,256 w. 1-0.61 -0.39 WACC = [0.61 [0.055 x (1-0.30)] + (0.39 0.09 ) WACC =0.023 +0.035 = 0.058 = 5,8% 3. Calculation of EVA EVA = EBIT 11:11-IWACC XTCEJ EBIT (1-7) 19525(1-0.30) =$13668 WACC = 5.8% TCE: PPE = 54,000 R&D 14,500 E/T 8.900 D+E=38,976 +25280 = 64,256 w. = 1-0.61 -0.39 WACC = [0.61 x{0.055 x (1-0.30)] + (0.39x0.09 ) WACC =0.023+0.035 = 0.058 =5.8% 3. Calculation of EVA EVA EBIT (1-1)-IWACC XTCEJ EBIT (1-7) - 19525(1-0.30) $13668 WACC - 5.8% TCE: PPE = 54,000 R&D=14,600 E/TE 8.900 TCE: 77.500 EVA-13668 -0.058% 77,500-59173 5. Residual income calculation: RIEBIT -Ir. x operating assets r. frisk premium Cash AR INVPPE 20,000 54.000 - 574.000 R= 19525- 74000 x 0.09] =512,865