Question

Tab, Inc., Income Statements for Fiscal Years 2003, 2004, and 2005 Amount (in millions of dollars) 2005 2004 2003 Revenues $25,000 20,000 $22,000 18,000 $21,000 17,000 Cost of sales $4,000 Gross profit Selling, general, and administrative expenses $5,000 500 $4,000 800 500 Operating income Interest and other nonoperating expense $4,500 200 $3,500 250 $3,200 250 $2,950 Earnings before income taxes Income tax $4,300 1.410 $3,250 975 885 Net income $2,890 $2,275 $2,065 Tab, Inc., Balance Sheets as of End of Fiscal Years 2003, 2004, and 2005 Amount (in millions of dollars) 2005 2004 2003 $200 Cash, cash equiv., and marketable securities Accounts receivable Inventories $150 1,350 7.500 $100 900 1,800 8.000 7.000 Total current assets Net property, plant, and equipment Intangible assets $10,000 $20,000 1,000 $31,000 $9,000 19,000 1,000 $29,000 $8,000 19,000 1,000 Total assets $28,000 Accounts payable Debt due in one year Long-term debt Shareholders' cquity $500 1,000 12,000 17,500 $790 1,000 13,000 14,210 $615 1,000 14.000 12,385 Total liabilities and equiry $31,000 $29,000 $28,000

Answer 1

- Cost of Sales for 2003 = $17000 millions

Cost of sales for 2005 = $ 20,000 millions

Benchmark in Horizontal common size Income Statement will be cost of sales of 2003 which will be 100%

So, Cost of sales relative to the benchmark = $ 20,000 millions/$ 17000 millions

= 118%

- Interest Coverage Ratio = EBIT/Interest expenses

= $ 22 billion/$2 billion

= 11 times

HENCE, OPTION C

EBIT = Earning before Tax + Interest expenses = $ 20 b + $ 2 b = $ 22 billion

- Net profit margin = 12%

tax rate = 40%

Before-tax profit margin = Net profit margin/(1-tax rate)

= 12%/(1-0.40)

= 20%

Hence, OPTION C

- Operating Profit Margin = 4%

Operating Profit Margin = Operating profit/Net Sales

Total Asset Turnover = 1.5 times

Total Asset Turnover = Net Sales/Total Assets

Operating Return on asset = Operating Income/Total Assets

So, Operating Return on asset = [Operating profit/Net Sales]*[Net Sales/Total Assets]

which can also be written as,

Operating Return on asset= Operating Profit Margin*Total Asset Turnover

= 4%*1.5times

= 6%

Hence, OPTION B