Exercise Chapter 4 [PDF]

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Chapter 4



Profitability Analysis



Problems and Cases 4.15 ANALYZING OPERATING PROFITABILITY. Exhibit 4.21 presents selected operating data for three retailers for a recent year. Macy’s operates several department store chains selling consumer products such as brand-name clothing, china, cosmetics, and bedding and has a large presence in the bridal and formalwear markets (under store names Macy’s and Bloomingdale’s). Home Depot sells a wide range of building materials and home improvement products, which includes lumber and tools, riding lawn mowers, lighting fixtures, and kitchen cabinets and appliances. Supervalu operates grocery stores under numerous brands (including Albertsons, Cub Foods, Jewel-Osco, Shaw’s, and Star Market). a. Compute the rate of ROA for each firm. Disaggregate the rate of ROA into profit margin for ROA and assets turnover components. Assume that the income tax rate is 35 percent for all companies. b. Based on your knowledge of the three retail stores and their respective industry concentrations, describe the likely reasons for the differences in the profit margins for ROA and assets turnovers. 4.16 CALCULATING AND INTERPRETING ACCOUNTS RECEIVABLE TURNOVER RATIOS. Microsoft Corporation (Microsoft) and Oracle Corporation (Oracle) engage in the design, manufacture, and sale of computer software. Microsoft sells and licenses a wide range of systems and application software to businesses, computer hardware manufacturers, and consumer retailers. Oracle sells software for information management almost exclusively to businesses. Exhibit 4.22 presents selected data for the two firms for 2006–2008.



Required a. Calculate the accounts receivable turnover ratio for Microsoft and Oracle for 2006, 2007, and 2008. b. Suggest possible reasons for the differences in the accounts receivable turnovers of Microsoft and Oracle during the three-year period. c. Suggest possible reasons for the changes in the accounts receivable turnover for the two firms over the three-year period.



EXHIBIT 4.21 Selected Data for Three Retailers (amounts in millions) (Problem 4.15)



Sales Cost of Goods Sold Interest Expense Net Income Average Inventory Average Fixed Assets Average Total Assets



Macy’s



Home Depot



Supervalu



$24,892 15,009 588 (4,803) 4,915 10,717 24,967



$71,288 47,298 624 2,260 11,202 26,855 42,744



$44,564 34,451 633 (2,855) 2,743 7,531 19,333



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EXHIBIT 4.22 Selected Data for Microsoft and Oracle (amounts in millions) (Problem 4.16) 2008



2007



2006



Microsoft Sales Average Accounts Receivable Change in Sales from Previous Year



$58,437 12,391 3.3%



$60,420 12,464 18.2%



$51,122 10,327 15.5%



Oracle Sales Average Accounts Receivable Change in Sales from Previous Year



$23,252 4,430 3.7%



$22,430 5,799 24.6%



$17,996 4,589 25.2%



4.17 CALCULATING AND INTERPRETING INVENTORY TURNOVER RATIOS. Dell produces computers and related equipment on a made-to-order basis for consumers and businesses. Sun Microsystems designs and manufactures higher-end computers that function as servers and for use in computer-aided design. Sun Microsystems sells primarily to businesses. It also provides services to business customers in addition to product sales of computers. Selected data for each firm for 2007–2009 appear in Exhibit 4.23. (Dell’s fiscal year-end is in January; Sun’s fiscal year-end is in June. As of the writing of this text, an acquisition of Sun by Oracle is pending.)



EXHIBIT 4.23 Selected Data for Dell and Sun Microsystems (amounts in millions) (Problem 4.17) 2009



2008



2007



Dell Cost of Goods Sold Average Inventories Change in Sales from Previous Year



$49,375 1,024 1.1%



$48,855 920 3.0%



$47,433 618 4.1%



Sun Microsystems Cost of Goods Sold Average Inventories Change in Sales from Previous Year



$ 5,948 623 10.4%



$ 6,639 602 2.1%



$ 6,778 532 3.7%



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Required a. Calculate the inventory turnover ratio for each firm for 2007–2009. b. Suggest reasons for the differences in the inventory turnover ratios of these two firms. c. Suggest reasons for the changes in the inventory turnover ratios during the three-year period.



4.18 CALCULATING AND INTERPRETING ACCOUNTS RECEIVABLE AND INVENTORY TURNOVER RATIOS. Nucor and AK Steel are steel manufacturers. Nucor produces steel in mini-mills. Mini-mills transform scrap ferrous metals into standard sizes of rolled steel, which Nucor then sells to steel service centers and distributors. Its steel falls on the lower end in terms of quality (strength and durability). AK Steel is an integrated steel producer, transforming ferrous metals into rolled steel and then into various steel products for the automobile, appliance, construction, and other industries. Its steel falls on the higher end in terms of quality. Exhibit 4.24 sets forth various data for these two companies for 2007 and 2008.



Required a. Calculate the accounts receivable turnovers for Nucor and AK Steel for 2007 and 2008. b. Describe the likely reasons for the differences in the accounts receivable turnovers for these two firms. c. Describe the likely reasons for the trend in the accounts receivable turnovers of these two firms during the two-year period. d. Calculate the inventory turnovers for Nucor and AK Steel for 2007 and 2008.



EXHIBIT 4.24 Selected Data for Nucor and AK Steel (amounts in millions) (Problem 4.18) 2008



2007



Nucor Sales Cost of Goods Sold Average Accounts Receivable Average Inventories Change in Sales from Previous Year



$23,663 19,612 1,420 2,005 +42.6%



$16,593 13,035 1,340 1,371 +12.5%



AK Steel Sales Cost of Goods Sold Average Accounts Receivable Average Inventories Change in Sales from Previous Year



$ 7,644 6,479 572 607 +9.2%



$ 7,003 5,904 686 752 +15.3%



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e. Describe the likely reasons for the differences in the inventory turnovers of these two firms. f. Describe the likely reasons for the trend in the inventory turnovers of these two firms during the two-year period.



4.19 CALCULATING AND INTERPRETING FIXED ASSETS TURNOVER RATIOS. Texas Instruments (TI) designs and manufactures semiconductor products for use in computers, telecommunications equipment, automobiles, and other electronicsbased products. The manufacturing of semiconductors is highly capital-intensive. HewlettPackard Corporation (HP) manufactures computer hardware and various imaging products, such as printers and fax machines. Exhibit 4.25 presents selected data for TI and HP for 2006–2008.



Required a. Compute the fixed assets turnover for each firm for 2006, 2007, and 2008. b. Suggest reasons for the differences in the fixed assets turnovers of TI and HP. c. Suggest reasons for the changes in the fixed assets turnovers of TI and HP during the three-year period.



4.20 CALCULATING AND INTERPRETING THE RATE OF RETURN ON COMMON SHAREHOLDERS’ EQUITY AND ITS COMPONENTS. JCPenney operates a chain of retail department stores, selling apparel, shoes, jewelry, and home furnishings. It also offers most of its products through catalog distribution. During fiscal Year 5, it sold Eckerd Drugs, a chain of retail drugstores, and used the cash proceeds,



EXHIBIT 4.25 Selected Data for Texas Instruments and Hewlett-Packard (amounts in millions) (Problem 4.19) 2008



2007



2006



Texas Instruments Sales Cost of Goods Sold Capital Expenditures Average Fixed Assets Percentage Fixed Assets Depreciated Percentage Change in Sales



$ 12,501 6,256 763 3,457 54.9% −9.6%



$ 13,835 5,432 686 3,780 52.3% −3.0%



$ 14,255 5,775 1,272 3,925 49.0% +6.4%



Hewlett-Packard Sales Cost of Goods Sold Capital Expenditures Average Fixed Assets Percentage Fixed Assets Depreciated Percentage Change in Sales



$114,552 86,351 3,695 11,050 74.7% −3.2%



$118,364 87,065 2,990 9,318 72.4% +13.5%



$104,286 76,965 3,040 7,331 87.0% +13.8%



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EXHIBIT 4.26 Selected Data for JCPenney (amounts in millions) (Problem 4.20) Year Ended January 31:



Sales Net Income (Loss) Interest Expense Preferred Stock Dividend Income Tax Rate January 31: Total Assets Preferred Stock Total Common Shareholders’ Equity



Year 5



Year 4



Year 3



$18,424 524 279 12 35%



$17,786 (928) 271 25 35%



$17,633 405 245 27 35%



Year 5



Year 4



Year 3



Year 2



$14,127 0



$18,300 304



$17,787 333



$18,048 363



4,856



5,121



6,037



5,766



in part, to repurchase shares of its common stock. Exhibit 4.26 presents selected data for JCPenney for fiscal Year 3, Year 4, and Year 5.



Required a. Calculate the rate of ROA for fiscal Year 3, Year 4, and Year 5. Disaggregate ROA into the profit margin for ROA and total assets turnover components. The income tax rate is 35 percent. b. Calculate the rate of ROCE for fiscal Year 3, Year 4, and Year 5. Disaggregate ROCE into the profit margin for ROCE, assets turnover, and capital structure leverage components. c. Suggest reasons for the changes in ROCE over the three years. d. Compute the ratio of ROCE to ROA for each year. e. Calculate the amount of net income available to common stockholders derived from the use of financial leverage with respect to creditors’ capital, the amount derived from the use of preferred shareholders’ capital, and the amount derived from common shareholders’ capital for each year. f. Did financial leverage work to the advantage of the common shareholders in each of the three years? Explain.



4.21 INTERPRETING THE RATE OF RETURN ON COMMON SHAREHOLDERS’ EQUITY AND ITS COMPONENTS. Selected financial data for Georgia-Pacific Corporation, a forest products and paper firm, appear in Exhibit 4.27.