use the Incomes Statement and EOY Balance Sheet line items in the table below fo

Question

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)

Explanation / Answer

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

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