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Statement of Comprehensive Income as of December 31, 2015
Heavy Metal Manufacturing (HMM) Metallic /stamping Inc. (MS) High-Tech Software Co. (HTS)
Sales R 75 000 000 R 50 000 000 R 100 000 000
Operating Expenses R 65 000 000 R 40 000 000 R 60 000 000
Operating Profit R 10 000 000 R 10 000 000 R 40 000 000
Interest Expenses R 3 000 000 R 3 000 000 R 0
Earnings before taxes R 7 000 000 R 7 000 000 R 40 000 000
Taxes (40%) R2 800 000 R 2 800 000 R 16 000 000
Net Income R 4 200 000 R 4 200 000 R 24 000 000
Statement of Financial Position as of December 31, 2015
Heavy Metal Manufacturing (HMM) Metallic /stamping Inc. (MS) High-Tech Software Co. (HTS)
Current Assets R 10 000 000 R 5 000 000 R 20 000 000
Net Fixed Assets R 90 000 000 R 75 000 000 R 80 000 000
Total Assets R 100 000 000 R 80 000 000 R 100 000 000
Current Liabilities R20 000 000 R 10 000 000 R 10 000 000
Long-term debt R40 000 000 R 40 000 000 R 0
Total liabilities R 60 000 000 R 50 000 000 R 10 000 000
Common stock R 15 000 000 R 10 000 000 R 25 000 000
Retained earnings R 25 000 000 R 20 000 000 R 65 000 000
Total common equity R 40 000 000 R 30 000 000 R 90 000 000
Total liabilities and common equit R 100 000 000 R 80 000 000 R 100 000 000
Use the DuPont system to compare the two heavy metal companies shown above (HHM and MS) during 2015.
a. Which of the two has a higher return on common equity? What is the cause of the difference between the two?
b. Calculate the return on common equity of the software company HTS. Why is this value so different from those of the heavy metal companies calculated in part (a)?
c. Compare the leverage levels between the industries. Which industry receives a greater contribution from the financial leverage as measured by assets-to-equity (A/E) ratio?
d. Can you make a meaningful DuPont comparison across industries? Why or why not?