Question: 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
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] for company B
2.Calculate the WACC of the company B
3.Calculate the EVA of company B
4.Calculate the residual income of company B
S olution for Company A
1DuPont Analysis
(1)(2)
R OE = [Gross profit /Sales] x [Sales/Total assets] x [Total a ssets/Equity]
(3)
1.NI/ sales =Margin = 12167 / 85,400 =0.14
{ Profitability }
2Sales / TA = Turnover = 85,400 /74000 =1.15[Efficiency] 3 . ROI = Margin x Turnover
4. TA - Liabilities = Equity
Equity = 74000-48720 =$25,280 = 25,280
T A / 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.
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.
C
alculation of EVA
E VA =EBIT [1-T] - [WACC x TCE]
E BIT [1-T] = 19525(1- 0.30) =$13668 WACC = 5.8 %
T CE :
PPE = 54,000
R&D =14,600
E / T=
8 ,900
TCE =
7 7,500
EVA =13668 - [0.058 x 77,500] = $ 9173
5. Residual Income calculation: R I = EBIT - [re x operating assets]
r e rf + risk premium
Cash + AR + INV + PPE = 20,000 +54,000 = $74,000 RI = 19525- [ 74000 x 0.09] =$12,865
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