Pls do not handwrite the answer, this is for easy reading

Question 4)

It is 2020, and you are now the Associate Director of Strategy at the corporate office in Hong Kong. The premium juice bar that you analysed as a graduate is now a profitable and sustainable business. The following is the relevant financial statements of the juice bar pilot program. You expect to derive more insights on the business by decomposing the factors of its return on equity(ROE) using the DuPont technique. You are also keen to come up with a long-term financial plan before devising an appropriate strategy for the wider business. In particular, you intend to estimate the additional debt funding needed given the project sales growth rate.

Balance sht of 31 December 2020

Cash 120,000 Capital 70,000

Account receivables 7,000 Retained earnings 90,000

Inventory 30,000 Total equity 160,000

Fixed assets 63,000

Account payables 22,000

Accruals 18,000

Long term debt 20,000

Total liabilities 60,000

Total assets 220,000 Total liabilities and equity 220,000

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INCOME STATEMENT FOR 2020

Sales 300,000.00

Cost of goods sold (10% sales) (30,000)

Gross profit 270,000

Fixed expenses (45,000)

Variable expenses (30% sales) (90,000)

Depreciation (50,000)

EBIT 85,000

Interest expense (3,200)

Earnings before tax 81,800

Income Tax (17%) (13,906)

Net income 67,894

Number of shares outstanding 20,000

EPS 3.39

The next stage of expansion requires significant investment, which management has agreed on additional discretional financing solely using debt issuance and the dividend payout ratio for the year would be 80%. It has been forecasted that the expansion plan will have sales growing by 20% from the current level.

To accommodate this growth, current assets, and fixed assets will increase by 35% and 25%, respectively. No changes are expected for depreciation, interest expense, and equity capital. Current liabilities will increase by 17.5%.

a)Calculate the following ration from the given data and compute the ROE from your calculated ratios.

i)Net profit margin

ii)Total assets turnover

iii)Equity multiplier

b)Compute additional discretionary financing needed for financial year 2021.

c)Compute the degree of operating leverage (DOL) and degree of financial leverage (DFL) after expansion.