Financial Performance
Part A Bigco’s balance sheet one year ago indicated retained earnings of $450 million. This year, Bigco’s net income was $35 million. It paid its preferred shareholders a dividend of $5 million and paid its common shareholders a regular dividend of $6 million, along with a special one-time dividend of $10 million. What should be the retained earnings amount on this year’s balance sheet?
Part B Wholesale Lumber, Ltd. is a firm that distributes lumber to building supply and home improvement retail stores. The firm’s cost of sales for the most recent year was $45 million, its beginning inventory was $16 million, and its ending inventory was $18 million. Estimate Wholesale Lumber’s purchases of lumber materials for the year.
Part C Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and equity of $40 million, as well as year 2 revenues of $87 million, net income of $22 million, assets of $70 million, and equity of $50 million.
Calculate Star’s return on equity (ROE) for each year based on the DuPont method and compare it with a direct ROE measure.
Next, explain why the firm’s ROE changed between year 1 and year 2.
Financial Performance
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Financial Performance
Part A: Bigco’s balance sheet one year ago indicated retained earnings of $450 million. This year, Bigco’s net income was $35 million. It paid its preferred shareholders a dividend of $5 million and paid its common shareholders a regular dividend of $6 million, along with a special one-time dividend of $10 million. What should be the retained earnings amount on this year’s balance sheet?
Amount in millions
Opening Retained earnings $ 450
Add: Net income $ 35
Total $ 485
Less: Dividends
Preferred dividends $ 5
Common dividends $ 6
Special dividends $ 10 ($ 21)
Closing Retained earnings $ 464
The retained earnings on this year’s balance sheet should be $ 464 million.
Part B: Wholesale Lumber, Ltd. is a firm that distributes lumber to building supply and home improvement retail stores. The firm’s cost of sales for the most recent year was $45 million, its beginning inventory was $16 million, and its ending inventory was $18 million. Estimate Wholesale Lumber’s purchases of lumber materials for the year.
Opening inventory + total purchases – closing inventory = total cost of sales
Total purchases = total cost of sales – opening inventory + closing inventory
Amount in millions
Total Cost of sales $ 45
Less: Opening inventory ($ 16)
Add: Closing inventory $ 18
Total Purchases $ 47
Wholesale Lumber’s purchases of lumber material for the year is $47 million.
Part C: Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and equity of $40 million, as well as year 2 revenues of $87 million, net income of $22 million, assets of $70 million, and equity of $50 million. Calculate Star’s return on equity (ROE) for each year based on the DuPont method and compare it with a direct ROE measure.
DuPont ROE (Amounts in millions)
DuPont ROE = (Net Profit/Revenue) * (Total Assets) * (Total Equity)
Year 1: (9/80) * (65) * (40) = $ 292.5
Year 2: (22/87) * (70) * (50) = $ 885.06
Direct ROE (Amount in millions)
ROE = Net Income/Shareholders’ Equity
Year 1: 9/40 = $ 0.225
Year 2: 22/50 = $ 0.44
Next, explain why the firm’s ROE changed between year 1 and year 2.
In the first year, the revenue, net income, total assets, and shareholders’ equity were low. In the second year, the net income, shareholders’ equity, and total assets of the company increased, increasing the ROE since the ROE is calculated using these items (Zulfiqar et al., 2016).
References
Zulfiqar, S., Haddad, H., Al-Shehhi, Y., & MATE, D. (2016). Financial performance of Islamic Bank in the United Arab Emirates, Pakistan and Jordan: a case comparative study with DuPont approach. Annals of the University of Oradea: Economic Science, 25(2), 403-410.
