Exam 4: Profitability Analysis

Carl Industries Carl Industries has condensed balance sheets as shown: Assets: Current assets 65,000 \ 46,500 \ 80,000 Plant \& equipment, net 600,000 420,000 410,000 Intangible assets, net 15,000 36,500 50,000 Total assets 680,000 \ 503,000 540,000 Liabilities \& Stockholders' Equity: Current liabilities \ 70,000 \ 25,000 \ 33,500 Long-term liabilities 420,000 290,000 400,000 Stockholders' equity 190,000 188,000 106,500 Total liabilities \& equity \ 680,000 \ 503,000 540,000 -Refer to the information for Carl Industries.In a common size balance sheet for 2010,plant and equipment (net)is expressed as: 

The profit margin for ROA indicates the ability of a firm to generate earnings for a particular level of:

The following balance sheets and income statements are for Net Devices Inc.,a manufacturer of small electronic devices,including calculators,personal digital assistants and mp3 players.Use the information to calculate the following information: a.Compute the rate of return on assets for Net Devices for both 2011 and 2010.Disaggregate the rate of return on assets into the profit margin on ROA and asset turnover components.The income tax rate is 35%. b.Calculate the accounts receivable turnover ratio for Net Devices for 2011 and 2010.All of the company's sales were made on account. c.Calculate the inventory turnover ratio for Net Devices for 2011 and 2010. d.Calculate the fixed assets turnover ratio for Net Devices for 2011 and 2010. e.Calculate the rate of return on common shareholders' equity for Net Devices for 2011 and 2010.The amount of preferred dividends paid each year appears after the income statement.Calculate profit margin for ROCE. f.Determine Net Devices capital structure leverage for 2011 and 2010. g.Calculate Net Devices earnings per share for 2011 and 2010. ASSETS (in thousands) Fiscal year end 2011 2010 2009 Cash \ 875,650 \ 571,250 \ 154,230 Marketable securities 6,560 0 0 Receivables 771,580 775,250 902,000 Inventories 1,320,150 1,254,600 1,418,500 Other current assets 249,000 231,200 229,900 Total current assets 3,222,940 2,832,300 2,704,630 Property, plant \& equipment 1,118,750 1,100,300 1,122,400 Intangibles 263,050 241,000 215,600 Deposits \& other assets 184,500 168,250 168,900 Total assets \ 4.789.240 \ 4.341.850 \ 4.211.530 $\text { LIABILITIES (in thousands) }$ Fiscal year end 2011 2010 Accounts payable \ 1,178,540 \ 1,061,100 \ 1,138,250 Current long term debt 18,100 316,500 150,900 Accrued expenses 664,100 615,900 585,400 Income taxes payable 138,900 108,400 38,200 Other current liabilities 0 0 0 Total current liabilities 1,999,640 2,101,900 1,912,750 Long term debt 478,250 378,400 599,630 Other long term liabilitieg 13,350 0 0 Total liabilities 2,491,240 2,480,300 2,512,380 Preferred stock 850,000 850,000 550,000 Common stock net 4,000 3,950 3,800 Additional Paid-in Capital 869,000 758,000 689,500 Retained earnings 1,430,500 1,055,000 1,245,050 Treasury stock (855,500) (805,400) (789,200) Shareholders' equity 2,298,000 1,861,550 1,699,150 Total Liab, \& Equity \ 4.789.240 \ 4.341.850 \ 4.211.530 INCOME STATEMENT (in thousands) Fiscal year end 2011 2010 Net sales \ 11,455,500 \ 11,082,100 Cost of Goods Sold (8,026,450) (7,940,065) Gross profit 3,429,050 3,142,035 Selling, general \& admin Exp. (1,836.400) (1,789,200) Income before deprec, \& amort, 1,592,650 1,352,835 Depreciation \& amortization (785,250) (757,250) Intereat expense (46,195) (43.340) Income before tax 761,205 552,245 Provision for income taxes (157,725) (112,290) Minority interest \ldots \ldots Net income \6 03.480 \ 439.955 ADDITIONAL INFORMATION Outstanding shares 308,515,000 303,095,000 Preferred Dividends--Total \ 85,000,000 \ 85,000,000

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETE (\$in thausands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 2010 2009 \ 875,650 \ 571,250 154,230 6,560 0 0 771,580 775,250 902,000 1,320,150 1,254,600 1,418,500 3,222,940 2,832,300 2,704,630 1,118,750 1,100,300 1,122,400 263,050 241,000 215,600 LIABILITIES (\ in thousands) Fiscal year end Accounts payable Current long term debt Accrued expenses Income taxes payable Other current liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Additional Paid-in Capital Retained earnings Treasury stock Shareholders' equity Total Liab, \& Equity 2011 2010 2009 \ 1,178,540 \ 1,061,100 \ 1,138,250 18,100 316,500 150,900 664,100 615,900 585,400 138,900 108,400 38,200 1,999,640 2,101,900 1,912,750 478,250 378,400 599,630 2,491,240 2,480,300 2,512,380 850,000 850,000 550,000 4,000 3,950 3,800 869,000 758,000 689,500 1,430,500 1,055,000 1,245,050 \ INCOME STATEMENTS (f in thousands) Fiscal year end Net sales \ 11,455,500 \ 11,082,100 Cost of Goods Sold Gross profit 3,429,050 3,142,035 Selling, general \& admin. Exp. Income before deprec. \& amort. 1,592,650 1,352,835 Depreciation \& amortization (785,250) (757,250) Interest expense Income before tax 761,205 552,245 Provision for income taxes (157,725) (112,290) Minority interest -- -- Net income Outstanding shares (in thousands) 308,515 303,095 Preferred Dividends (in thousands) \ 85,000 \ 85,000 -Refer to the information for Net Devices Inc.What is the inventory turnover for Net Devices for 2011?

Net Devices Inc. The following balance sheets and income statements are for Net Devices Inc., a manufacturer of small electronic devices, including calculators, personal digital assistants and mp3 players.For purposes of these questions assume that the company has an effective tax rate of 35%. BALANCE SHEETS $\text { ASEETE (\$in thausands) }$ Fiscal year end Cash Marketable securities Receivables Inventories Other current assets Total current assets Property, plant \& equipment Intangibles Deposits \& other assets Total assets 2011 2010 2009 \ 875,650 \ 571,250 154,230 6,560 0 0 771,580 775,250 902,000 1,320,150 1,254,600 1,418,500 3,222,940 2,832,300 2,704,630 1,118,750 1,100,300 1,122,400 263,050 241,000 215,600 LIABILITIES (\ in thousands) Fiscal year end Accounts payable Current long term debt Accrued expenses Income taxes payable Other current liabilities Total current liabilities Long term debt Other long term liabilities Total liabilities Preferred stock Common stock net Additional Paid-in Capital Retained earnings Treasury stock Shareholders' equity Total Liab, \& Equity 2011 2010 2009 \ 1,178,540 \ 1,061,100 \ 1,138,250 18,100 316,500 150,900 664,100 615,900 585,400 138,900 108,400 38,200 1,999,640 2,101,900 1,912,750 478,250 378,400 599,630 2,491,240 2,480,300 2,512,380 850,000 850,000 550,000 4,000 3,950 3,800 869,000 758,000 689,500 1,430,500 1,055,000 1,245,050 \ INCOME STATEMENTS (f in thousands) Fiscal year end Net sales \ 11,455,500 \ 11,082,100 Cost of Goods Sold Gross profit 3,429,050 3,142,035 Selling, general \& admin. Exp. Income before deprec. \& amort. 1,592,650 1,352,835 Depreciation \& amortization (785,250) (757,250) Interest expense Income before tax 761,205 552,245 Provision for income taxes (157,725) (112,290) Minority interest -- -- Net income Outstanding shares (in thousands) 308,515 303,095 Preferred Dividends (in thousands) \ 85,000 \ 85,000 -Refer to the information for Net Devices Inc.What is the rate of return on assets for Net Devices for 2011?

Time-series analysis helps answer all of the following questions except:

Return on assets can be disaggregated into asset turnover and ____________________________________________________________.

Below is financial information for two restaurant retailers.Popper's Company operates an innovative retail bakery-cafe business and franchising business.At the end 2010,Popper's had 132 company-owned and 346 franchise-operated bakery-cafes.Popper's located most of their unique bakery-cafe concept stores in suburban,strip mall,and regional mall locations.As a first mover in this concept,the company operates in 32 states.Simmer Corporation began operations five years earlier than Popper's and purchases and roasts whole bean coffees and sells them,along with numerous coffee drinks and related products at over 2,900 Company-operated retail stores. Selected Data for Popper's Company and Simmer Corporation (amounts in millions) Net Sales Sales Simmer \ 5,000 Popper's 300 Cost of Goods Sold Interest Expense Net Income Average Inventory Average Fixed Assets Simmer \4 ,076 1,686 0 268 303 2,163 Роррег's \2 78 97 0 22 4 130 Required: a.Compute the Inventory turnover,fixed asset turnover,and accounts receivable turnover. b.Describe the likely reasons for the difference in the accounts receivable turnover and the inventory turnover

Freedom Company reported net income for 2010 of $2,031 million on sales of $25,600 million.Interest expense for 2010 was $235 million,and minority interest was $344 million for 2010.The income tax rate is 40 percent.Total assets were $10,800 million at the beginning of 2010 and $14,874 million at the end of 2010.Compute the rate of ROA for 2010 and disaggregate ROA into profit margin for ROA and asset turnover components.

Explain the difference between a simple and complex capital structure as the terms are used in the calculation of EPS.

Which of the following industries would you expect to have,on average,high asset turnover and low profit margin?

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries.The company has an effective tax rate of 35%. Balance Sheet Assets: Cash Accounts Receivable (net) Inventory Long-lived assets Less: Accumulated depreciation Total assets 2011 2010 \ 10,000 \ 6,000 6,000 1,500 8,000 10,000 12,000 11,000 $\text { Liabilities and Stockholders' Equity: }$ Accounts payable \ 5,000 \ 6,000 Deferred revenues 1,000 2,000 Long-term note payable 10,000 10,000 Less: Discount on note payable (800) (1,000) Common stock 12,000 6,000 Retained earnings Total liabilities and stockholders' equity Income Statement For the year ended December 31, 2011 Revenues \4 2,000 Cast af goods sold (24,000) Depreciation expense (2,000) Interest expense (3,000) Bad debt exanense (2,000) Other expense (including income taxes) Net incame -Refer to the information for Orca Industries.The return on common shareholders' equity for Orca Industries is:

Carridine Company reported net income of $1,903 on revenues of $55,618 for Year 4.Interest expense totaled $459,and preferred dividends totaled $13.5.Average total assets for Year 4 were $17,500.The income tax rate is 40 percent.Average preferred shareholders' equity totaled $250,and average common shareholders' equity totaled $7,500.Assume that all the following amounts are in thousands. REQUIRED: a.Compute the rate of ROA.Disaggregate ROA into profit margin for ROA and assets turnover components. b.Compute the rate of ROCE.Disaggregate ROCE into profit margin for ROCE,assets turnover,and capital leverage ratio components. c.Calculate the amount of net income to common shareholders derived from the excess return on creditors' capital,the excess return on preferred shareholders' capital, and the return on common shareholders' capital.

Carl Industries Carl Industries has condensed balance sheets as shown: Assets: Current assets 65,000 \ 46,500 \ 80,000 Plant \& equipment, net 600,000 420,000 410,000 Intangible assets, net 15,000 36,500 50,000 Total assets 680,000 \ 503,000 540,000 Liabilities \& Stockholders' Equity: Current liabilities \ 70,000 \ 25,000 \ 33,500 Long-term liabilities 420,000 290,000 400,000 Stockholders' equity 190,000 188,000 106,500 Total liabilities \& equity \ 680,000 \ 503,000 540,000 -Refer to the information for Carl Industries.In a percentage change balance sheet over the period of 2009 to 2011,what is the change in current assets? 

In order to measure how profitable a firm is in generating a return for its common shareholders,a financial analyst would examine the return on _____________________________________________.

When an analyst uses measures of past profitability to forecast the firm's future profitability the expectation is that those revenues,gains,expenses and losses will ____________________.

When calculating the return on fixed assets sales is divided by _________________

Firms with complex capital structures can use which of the following in calculating EPS?

The ___________________________________ of interest expense on net income equals one minus the marginal tax rate times interest expense.

Carl Industries Carl Industries has condensed balance sheets as shown: Assets: Current assets 65,000 \ 46,500 \ 80,000 Plant \& equipment, net 600,000 420,000 410,000 Intangible assets, net 15,000 36,500 50,000 Total assets 680,000 \ 503,000 540,000 Liabilities \& Stockholders' Equity: Current liabilities \ 70,000 \ 25,000 \ 33,500 Long-term liabilities 420,000 290,000 400,000 Stockholders' equity 190,000 188,000 106,500 Total liabilities \& equity \ 680,000 \ 503,000 540,000 -Refer to the information for Carl Industries.In a common size balance sheet for 2009,total liabilities and equity are expressed as: