Homework Sourseuse the Incomes Statement and EOY Balance Sheet line items i
use the Incomes Statement and EOY Balance Sheet line items in the table below for questions 1-6:
1. Use End of Year (EOY) balances to compare fiscal year 2017 to fiscal year 2016.According to Dupont’s ROE, which of the following statements is most likely FALSE?
a. The company’s capital structure had more debt in 2017 as compared to 2016
b. The company had more sales per dollar of total assets in 2017 as compared to 2016
c. The company had the same operating margin in 2017 as compared to 2016
d. The company had a better tax burden ratio in 2017 as compared to 2016
e. The company had a worse interest burden ratio in 2017 as compared to 2016
| (in USD millions) | December-16 | December-17 |
| Sales | 8000 | 10000 |
| Operating Income | 1600 | 2000 |
| Net Income | 600 | 800 |
| Cash | 1100 | 1300 |
| Marketable Securities | 100 | 300 |
| Accounts Payable | 600 | 800 |
| Accounts Receivable | 800 | 900 |
| Current portion of LT Debt | 300 | 100 |
| Inventory | 500 | 600 |
| Gross PPE | 3000 | 3300 |
| Net PPE | 2500 | 2700 |
| Long Term Debt | 2100 | 2400 |
| Interest Expense | 800 | 900 |
| Dividends | 150 | 250 |
| Shares Issued (Repurchased) | (50) | (50) |
Solution
a. Total debt in 2016 = 2100 + 300 = 2400. Total debt in 2017 = 2400+100 = 2600. So, capital structure had more debt in 2017 when compared to 2016 (TRUE STATEMENT)
b. Total Assets in 2016 = Cash + Merketable securities + Accounts rec. + Inventory + Net PPE = 1100+100+800+500+2500 = 5000. Sales per dollar of assets in 2016 = 8000/5000 = 1.6
Total Assets in 2017 = 1300+300+900+600+2700 =5800. Sales per dollar of assets in 2017 = 10000/5800 = 1.72
So, there was more sales per dollar assets in 2017 than in 2016 (TRUE STATEMENT)
c. Operating margin in 2016 = 1600/8000 = 0.2. Operating margin in 2017 = 2000/10000 = 0.2. So company had the same operating margin in 2017 and 2016 (TRUE STATEMENT)
d. Tax burden was lower in 2017. Hence the company had a better tax burden ratio in 2017 (TRUE STATEMENT)
e. The company had a higher interest burden ratio in 2017 which indicates that it was not the worse . The lower the interest burdent ratio, the worse it is.(FALSE STATEMENT)
| 2016 | 2017 | |
| EBIT | 1600 | 2000 |
| Interest expense | 800 | 900 |
| EBT | 800 | 1100 |
| Taxes | 200 | 300 |
| Net Income | 600 | 800 |
| Tax burden (Net Income/EBT) | 0.75 | 0.727273 |
| Interest Burden (EBT/EBIT) | 0.5 | 0.55 |
