Question

Question 1 [15 marks] Sales Operating Expenses Operating Profit Interest Expenses Eames before taxes Taxes (4074 Net Income Statement of Comprehensive Income as of December 31, 2015 Heavy Metal Manufacturing (HMM Metallic/stamping Inc (MB) R75000000 RS0000000 R 000000 R40000000 R 10000000 R 1000000 R300000 R3000000 R7000000 R700000 R22wcow R2800000 R4200000 R4200000 High-Tech Software Co (HTS) R 100000000 REO000000 R40000000 RO R40000000 R 1600000 R24000000 Statement of Ananda Positionas of December 21, 2015 Heavy Metal Manufacunng(HMM Metallic/stamping Inc (N) Current Assets R10000000 R5000000 Net Fixed Assets R9000000 R75000000 Total Assets R100000000 R&0000000 Current Latalities R2000000 R 10000000 Long termdett R40000000 R400000 Total liabilities REO000000 R 50000000 Contron stock R 15000000 R 1000000 Retaned earning R2500000 R20000000 Total commonequity R40000000 R30000 Total liabilites and commoneque R1000000 R&000000 High-Tech Software CA (HIS) R20000000 R 80000000 R 100000000 R 10000000 RO R 10000000 R25000000 R6000000 R9000000 R 100000000 Use the DuPont system to compare the two heavy metal companies shown above (HHM and MS) during 2015 a. Which of the two has a higher return on common equity? What is the cause of the difference between the two? b Calculate the return on common equity of the software company HTS Why is this value so different from those of the heavy metal companies calculated in part (a)? (2) c Compare the leverage levels between the industries which industry receives a greater contribution from the financial leverage as measured by assets-to-equity (AVE) ratio? (4) d Can you make a meaningful DuPont comparison across industries? Why or why not?

Answer 1

a)

Return on Equity

HMM

Return on equity = Net income/Equity

4200000/40000000

=0.105

As per DuPont,

ROE = profit margin x asset turnover x financial leverage

ROE= Net income/sales x sales/total assets x total assets/equity

= 4200000/75000000 x 75000000/ 100000000 x 100000000/40000000

0.056 x 0.75 x 2.5

=0.105

MS

same way calculating ROE,

=4200000/50000000 x 50000000/80000000 x 80000000/30000000

=0.084 x 0.625 x 2.66

= 0.14

The roi of MS is higher than HMM because the profit margin ratio and the leverage ratio is higher for MS. though the asset turnover ratio is higher for HMM but the combined effect of profit margin and leverage is higher than the asset turnover ratio.

b)

ROI for HTS

using the same formula mentioned above

24000000/100000000 x 100000000/100000000 x 100000000/90000000

0.24 x 1 x 1.11

=0.266

the roe is higher than the other two companies because the company is able to utilise its assets efficiently than HMM and MS, the profit margin is also higher.

C)

Asset to equity ratio = Total assets/ total equity

HMM

100000000/40000000

=2.5

MS

80000000/30000000

=2.66

HTS

100000000/90000000

=1.11

Company MS has higher leverage followed by company HMM.

HTS does not have long term debt in its capital structure while company MS has comparatively higher leverage than HMM and is also having higher ROE than HMM.

Company MS is able to receive a higher contribution from financial leverage than company HMM.

d)

The DuPont comparison can be made among the various industries and it can be found which industry is able to have a higher profit margin or asset utilization or financial leverage.