2 Income Statement

Revenues 9162
Operating expenses
Cost of sales 2453
R&D expenses 507
S,G & A 2423
Other operating expenses 2929 8312
Operating income after tax 850
Net financial expenses after tax
Interest expense 153
Interest income 94 59
Net income 791

Balance sheet
Year 2 Year 1 Year 2 Year 1
Operating assets 28631 30024 Operating liabilities 7194 8747
Financial assets 4457 4238 Financial liabilities 7424 6971
33088 34262 Common equity 18470 18544
33088 34262

Cash flow statement

Cash flow from operations 584

Cash investment
Free cash flow 424

a Supply all the missing numbers

21277
21437
160
 Analysis of Profitability

How ratios aggregate to explain Return on Common

Equity (ROCE)

How economic factors determine ratios

How financial leverage affects ROCE

How operating liability leverage affects ROCE
The difference between Return on Net Operating Assets
(RNOA) and Return on Assets (ROA)
How profit margins, asset turnovers and their composite
ratios drive RNOA

How borrowing costs are analyzed

How profitability analysis can be used to ask penetrating

questions regarding the firms activities
on Common

ROCE
Operating Assets

d their composite

o ask penetrating
ROCE is decomposed into drivers over thre
levels of analysis:

Analysis of Leverage

Analysis of Operating Profitability

Analysis of Net Borrowing Costs

rivers over three

ability

osts
ROCE = RNOA + FLEV x [RNOA NBC]

The equation says that ROCE is driven by

three factors:

Profitability of Operations: RNOA

Financial Leverage: FLEV = NFO/CSE

3. Operating Spread: RNOA - NBC

OA NBC]

E is driven by

RNOA

NFO/CSE

A - NBC
 Drivers of ROE

(In millions of dollars)

NOA ### OI
NFO ### NFE
CSE ### CI

Compute the Following

ROE 0.265492
RNOA 0.125219
NBC 0.04119
FLLEVERAGE 1.669355
SPREAD 0.084029

Show that ROE=RNOA+FLLEV(SPREAD) 0.265492

ROE
ROE ROE ROE
Leverage 26.55% RNOA 26.55% NBC 26.55%
1.60 3.00% 0.03
1.63 5.00% 0.04
1.66 7.00% 0.05
1.69 9.00% 0.06
1.72 11.00% 0.07
1.75 13.00% 0.08
1.78 15.00% 0.09
1.81 17.00% 0.1
1.84 19.00% 0.11
1.87 21.00% 0.12
1.90 23.00% 0.13

Comment
###
###
###
 NOA ### OI
NFO ### NFE
CSE ### CI
NFO -36,906
NEGATIVE LEVERAGE(FINANCL ASSETS ARE MORE THAN FINAN LIAB)

Compute the Following

ROE 0.1573338695
RNOA 0.4892820953
NBC 0.0419443993
FLLEVERAGE -0.7420528803
SPREAD 0.447337696

ROE 0.1573338695

Comment
 OI ###
NFE ###
CI ###
NFI 1,548
 Reformulated Balancesheet of Dell

Operating Assets
Operating Cash 25
Accounts receivable 2269
Inventories 278
PPE 826
Other assets 1875
Total 5273
Operating Liabilities
Accounts payable 5075
Accrued liabilities 2444
other liabilities 802
Total 8321
Net Operating assets -3048
Net financial assets 7742
Equity 4694

Operating income 1284

Required rate of return(Firm) 0.09

How much is Residual operating income 1558.32

Comment
Net income 405
Operating Income 423
Equity 3936
Net Operating Assets 4395
Net Financial Obligations 459
Net Financial Expenses 18

Show that the ROE= RNOA+FLEV* SPREAD

RNOA 0.096246
FLEV 0.116616 NBC 0.039216
SPREAD 0.05703

ROE 0.102896
ROE 0.102896
 The following information is from reformulated financial statements(in million dollars)

2005 2006
Operating Assets 2000 2700 2350
Marketable securities 400 100 250
Operating liabilities -100 -300 200 2150
Bonds payable -1400 -1300 1350
Book value 900 1200 1050

Sales 2100
Operating Expenses -1677
Interest revenue 27
Interest expense -137
Tax(34%) -106
Earnings 207

a Calculate Dividends for 2006

b Calculate ROE for 2006[use aveage book value]
c Calculate RNOA for 2006[use average NOA]
d Supply the numbers for the following:(Use average)
ROE= PM X ATO+ Financial leverage X[RNOA-NBC]
e Firm's short term borrowing rate is 4.5% after tax. Supply numbers for
RNOA=ROOA+(OLLEV X OLSPREAD)
 ROE 0.197 OI 423 PM
RNOA 0.196744 NOA 2150 ATO
FL
NBC

ROE

ROOA 0.18383
OLLEV 0.093023
OLSP 0.139
9 RNOA 0.196744
0.098571 NFO 1100
0.976744 NFE 110
1.047619
0.1

0.1976
 Debt - to - Equity Total Debt
Equity

FLEV NFO
CSE

Problems with Debt-to-Equity ratio:

Excludes financial assets (which effectively
Includes operating liabilities
ty ratio:
hich effectively defease debt)