Question

URGENT IF SOMEONE CAN HELP ME: Below you find a consolidated historical balance sheet and profit & loss statement of a company before it is sold in 2019. (1) Calculate only the economic profit of this company for all years (provide a breakdown of your numbers into ROIC after tax compared to WACC by all the years under observation). (2) Given your analysis, what would you conclude given the competitive position of the company measured in economic profit?

Additional information and assumptions:

- The weighted average cost of capital is 7%

- Tax rate is 25%

Invested Capital Calculation 2014 x $1billion 2013 2015 2016 2017 2018 Current assets 4.244 5.705 5385 4.359 3.895 4930 7.492 7.889 9894 Non-interest-bearing current liabilities 10.670 10.286 8.012 3.597 .740 -4.580 4.509 Investment in (operating) working capital 3.645 3.653 8.915 9.52 8532 7961 Net property, plant, and equipment 9.330 9.059 Other operating assets 24.689 25.534 41836 41529 39.834 32591 40.552 Investmen n fixed and other operating assets 33.604 34.864 50.998 50.588 48.366 Investment in operating assets 30.007 31.219 45.258 46.008 43.857 36.899 43.857 Total investor funds 30.007 31.219 45.258 46.008 36.899 Equity 20.593 22.759 26.032 27.460 27.482 24.355 9.414 13.548 12.544 All interest earning debt 8.460 19.226 16.375 30.007 Total investor funds 31.219 45.258 46.008 36.899 43.857 Consolidated Financial Statements of Operations x $1 billion 2013 2014 2015 2016 2017 2018 Net sales 18.020 100% 19.408 100% 21.760 100% 23.213100% 22.311100% 22.130 100% Cost of sales 14.321 79% 15.168 78% 15565 72% 17693 78% 16.645 75% 16351 74% 3.699 21% 6.195 28% 5.666 25% Gross profit 4.240 22% 5.520 24% 5.779 26% 1.317 6% Depreciation Selling. general and administrative expenses Total expense 1.080 6% 1.113 6% 1.182 5% 1.424 6% 1.395 6% 00% 0% 00% 00% 0 0% 00% о O 1.080 6% 1.113 6% 1.182 5% 1.317 6% 1.424 6% 1.395 6% 4.384 2D% Income before Interest and taxes 2.619 15% 3.127 16% 5.013 23% 4.203 18% 4.242 19% 1.926 8% 1.189 790 1.382 7% 1683 8% 1.636 7% 1.493 7% Interest income -883 5% Interest expense -879-596 -1.093-5% 1.055-5% -1.047-5% Income before taxes 2.929 16% 3.626 19% 5.603 26% 4.712 20% 4.823 22% 4.830 22% 1.173-5% Income taxes -848-5% 1.126-5% 1.201-5% 1.273-6% -67 Net income 2.081 12% , 2.557 13% 4.477 21% 3.511 15% 3.650 16% 3.557 16%

Answer 1

Part (1)

Please see the table below. Please be guided by the second column. That will help you understand the mathematics. Figures in parenthesis mean negative value.

Parameter	Linkage	2013	2014	2015	2016	2017	2018
Debt	D	9.414	8.460	19.226	18.548	16.375	12.544
Equity	E	20.593	22.759	26.032	27.460	27.482	24.355
Total Invested Capital	IC = D + E	30.007	31.219	45.258	46.008	43.857	36.899
EBIT		2.619	3.127	5.013	4.203	4.242	4.384
NOPAT = EBIT x (1 - T)	=EBIT x (1 - 25%)	1.964	2.345	3.760	3.152	3.182	3.288
ROIC	NOPAT / IC	6.55%	7.51%	8.31%	6.85%	7.25%	8.91%
WACC		7.00%	7.00%	7.00%	7.00%	7.00%	7.00%
Economic Spread	ROIC - WACC	-0.45%	0.51%	1.31%	-0.15%	0.25%	1.91%
Economic Profit	Economic spread x IC	(0.136)	0.160	0.592	(0.068)	0.112	0.705

Part 2)

The company has positive economic profits in most of the years except 2013 and 2016. There is no specific trend evident in the economic profit. Given the competitive environment, it must be enormous pressure on the company to maintain operating margin and positive economic profits.