Question

Question 1 The following table presents historical data for ShipCo, a manufacturer of ships. Shipco: Income Statement and Balance Sheet $ million Income statement Revenues Cost of sales Selling, general, and administrative Depreciation EBIT Interest expense Gain/(loss) on sale of assets Earnings before taxes Taxes Net income Year 1 530.0 (344.5) (79.5) (15.9) 90.1 (7.5) Year 2 556.5 (364.5) (86.3) (16.7) 89.0 (7.5) (10.0) 71.5 (21.5) 50.1 Year 3 601. 0 (396.7) (87.1) (18.0) 99.2 Year 4 661.1 (439.6) (92.6) (19.8) 109.1 (7.5) Year 5 674.3 (451.8) (107.9) (20.2) 94.4 (7.5) 82.6 (24.8) 57.8 91.7 (27.5) 101.6 (30.5) 71.1 86.9 (26.1) 60.8 Dividends 17.3 17.0 18.0 17.8 18.3 Year 1 10.6 102.8 Balance sheet Operating cash Excess cash and marketable securitie! Accounts receivable Inventory Current assets Year 2 11.1 108.9 80.7 183.6 384.3 Year 3 12.0 111.2 93.2 204.3 420.7 Year 4 13.2 118.2 99.2 231.4 462.0 Year 5 13.5 139.8 97.8 242.8 493.8 79.5 169.6 362.5 Property, plant, and equipment Equity investments 206.7 180.0 219.8 180.0 240.4 180.0 267.8 180.0 276.5 180.0 Total assets 749.2 784.2 841. 1 9 09.8 950.3 Accounts payable Short-term debt Accrued expenses Current liabilities 116.6 45.0 90.1 251.7 119.6 45.0 89.0 253.7 126.2 45.0 93.2 264.4 135.5 45.0 99.2 279.7 134.9 45.0 97.8 277.6 Long-term debt Common stock Retained earnings 105.0 100.0 292.5 105.0 100.0 325.5 105.0 100.0 371.7 105.0 100.0 425.1 105.0 100.0 467.6 Total liabilities and equity 749.2 784.2 841. 1 909.8 950.3

Part a Answer was given but i dont understand how to get these numbers. Please help me with part a

Answer 1

Part a

The formula for calculating operating margin is as follows

Operating margin. = (NOPAT÷ sales revenue)× 100

NOPAT means net operating profit after tax which is EBIT×(1-tax rate).

	Year2	year3	year4	year5
EBIT	89	99.2	109.1	94.4
(1-tax rate)	(1-30%) = 0.7	0.7	0.7	0.7
EBIT×(1- tax rate)	62.3	69.44	76.37	66.08
Sales	556.5	601	661.1	674.3
EBIT×(1-tax rate) ÷ sales	(62.3÷556.5)×100= 11.2%	(69.44÷601)×100= 11.6%	76.37÷661.1)×100= 11.6%	(66.08÷674.3)×100= 9.8%

ROIC means Return on invested capital which is calculated as follows

ROIC = NOPAT ÷ Invested capital × 100

NOPAT is same as shown in the above table i.e., the figures corresponding to EBIT× (1- tax rate).

Whereas the invested capital means sum of debt (i.e., short term as well as long term) and equity and reduced by cash in hand , marketable securities and equity investment.

	Year2	year3	year4	year5
Long term debt(a)	105	105	105	105
Short term debt(b)	45	45	45	45
Common stock (c)	100	100	100	100
Retained earnings(d)	325.5	371.7	425.1	467.6
Operating cash(e)	11.1	12	13.2	13.5
Marketable securities(f)	108.9	111.2	118.2	139.8
Equity investment(g)	180	180	180	180
(a+b+c+d-e-f-g)= invested capital	275.5	318.5	363.7	384.3
(Nopat÷invested capital)×100 = ROIC	22.7	22	21	17.1

The figures have been approximated to nearest value. So, any difference is attributable to approximation.

Capital turnover can be calculated in two ways

Firstly it can be calculated as sales divided by invested capital.

Secondly it can be also be calculated as ROIC ÷ operating margin

	Year2	year3	year4	year5
ROIC	22.8	22.5	21.6	17.1
Operating margin	11.2	11.6	11.6	9.8
Captial turnover	22.8÷11.2= 2.04	1.95	1.87	1.74
Sales	556.5	601	661.1	674.3
Invested capital	275.5	318.5	363.7	384.3
Capital turnover	2.02	1.9	1.8	1.75