Question No. 9 a,b,c(P181) I have solution I need just interpretation (using Excel)

Question No. 9 a,b,c(P181)

I have solution

I need just interpretation (using Excel)

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9.
a.
Working capital requirement (WCR) = Accounts receivable + Inventories + Prepaid expenses
– Accounts payable – Accrued expenses
June 30, 2009
WCR = \$1,953 + \$1,986 + \$80 – \$1,450 – \$98 =
\$2,471
December 31, 2009
WCR = \$2,616 + \$2,694 + \$42 – \$1,950 – \$114 =
\$3,288
June 30, 2010
WCR = \$2,100 + \$2,085 + \$25 – \$1,650 – \$138 =
\$2,422
Managerial balance sheets
in thousands
June 30,
2009
December 31,
2009
June 30,
2010
Invested capital
Cash
\$
160
\$
60
\$
70
Working capital requirement (WCR)
2,471
3,288
2,422
Net fixed assets
733
818
830
Total invested capital
\$3,364
\$4,166
\$3,322
Capital employed
Short-term debt
\$
50
\$
880
\$
50
Long-term financing
3,314
3,286
3,272
Long-term debt
\$
800
\$
750
\$
700
Owners’ equity
2,514
2,536
2,572
Total capital employed
\$3,364
\$4,166
\$3,322
b.
Operating margin
= EBIT/Sales
Invested capital turnover
= Sales/Invested capital
Return on invested capital
= EBIT/Invested capital
Financial multiplier
= (EBT/EBIT) × (Invested capital/Owners’ equity)
Tax effect
= EAT/EBT
Return on equity
= EAT/Owners’ equity
6 Months to 6/30/2009
5-1

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Operating margin
= \$117/\$10,655 =
1.1%
(rounded)
Invested capital turnover
= \$10,655/\$3,364 =
3.17
(rounded)
Return on invested capital
= \$117/\$3,364 =
3.48%
Financial multiplier
= (\$55/\$117) × (\$3,364/\$2,514) = 0.47 × 1.34 =
0.63
(rounded)
Tax effect
= \$32/\$55 =
0.58
Return on equity
= \$32/\$2,514 =
1.3%
6 Months to 12/31/2009
Operating margin
= \$200/\$13,851 =
1.4%
Invested capital turnover
= \$13,851/\$4,166 =
3.32
Return on invested capital
= \$200/\$4,166 =
4.80%
Financial multiplier
= (\$110/\$200) × (\$4,166/\$2,536) = 0.55 × 1.64 =
0.90
Tax effect
= \$66/\$110 =
0.60
(rounded)
Return on equity
= \$66/\$2,536 =
2.6%
6 Months to 6/30/2010
Operating margin
= \$133/\$11,720 =
1.1%
Invested capital turnover
= \$11,720/\$3,322 =
3.53
(rounded)
Return on invested capital
= \$133/\$3,322 =
4.00%
Financial multiplier
= (\$63/\$133) × (\$3,322/\$2,572) = 0.47 × 1.29 =
0.61
(rounded)
Tax effect
= \$37/\$63 =
0.59
Return on equity
= \$37/\$2,572 =
1.4%
c.
Return on equity is higher in the second part of the year than in the first half (2.6 percent versus
1.3/1.4 percent) for the following reasons:
1. Operating margin is higher in the second half of the year as a result of higher sales and
operational leverage (fixed costs effect).
5-2

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