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A. a. Henry Black Ltds Balance Sheet as at 30 June, 2021 and Profit and Loss Statement for the financial year ending 30 June, 2021 (2020-21) contained the following items :

- Accounts Receivable (and Average Accounts Receivable for 2020-21), $50,000,000 - Inventories (and Average Inventories for 2020-21), $80,000,000

- Other Assets, $270,000,000

- Total Liabilities (Current and Long-term), $150,000,000

- Issued and paid-up capital 15,000,000 fully paid ordinary shares $150,000,000

- Other Shareholders Equity Items, being Reserves and Retained Earnings, $100,000,000 - Sales (all credit), $800,000,000

- Cost of sales, $600,000,000

- Earnings before Interest and Taxes (EBIT), $100,000,000

- Interest Expense, $20,000,000 (paid on Total Liabilities above)

- Company Income Tax Rate, 30%

- Interest rate on Total Liabilities, 13.3333%

.

Additional information.

All reported items and the resultant profit or loss figures relate to the companys basic operations. The company operates in a competitive industry.

REQUIRED :

Calculate as at 30 June, 2021, the following financial ratios for Henry Black Ltd :

i. Return on sales (also known as profit margin or operating profit margin)

ii. Return on assets (ROA)

iii. Return on equity (ROE)

iv. Interest coverage

v. Debt to equity

vi. Inventory turnover

vii. Average receivable turnover

viii. Average collection period

[NOTE: Show all workings.]

b. Comment upon these ratios as to whether they are favourable or not for a prospective investor. Is there any further information you require before you make an investment recommendation?

ANSWER.

B. Based on the data and your answers in Part A. above, calculate:

I. the ROE using the Du Pont method (using Formula 20 on the attached Formulae Sheet); and II. the ROA (using Formula 22 on the attached Formulae Sheet).

III. Are your answers the same as in Question 3. A. a. iii. and ii. above? Why or why not? (NOTE: Show all workings. Responses to I. and II. above which simply show the same answers as in Question 3.A. a. iii. and ii., without using the Formulae 20 & 22, will receive zero marks.)

FORMULAE SHEET

1. P/E = Price per share (Po) / Earnings per share (EPS₁)

2. E/P = EPS₁ / Po

3. DDM: Vo / Po = D₁ / (1 + k_e) + D₂ / (1 + k_e)² + . Dn / (1 + k_e)ⁿ + Pn / (1 + k_e)ⁿ 4. DDM: Vo / Po = Do (1 + g) / (k_e g) = D₁ / (k_e g)

5. g = ROE x RR = ROE x Plowback ratio = ROE x [1 Dividend payout ratio (DPO)] 6. DPO ratio = Dividend paid or payable /EPS

7. EC: Vo / Po= [E₁ /k_e]

8. EC with growth opportunities: Vo / Po = [E₁ / k_e] + PVGO

9. FCFF = EBIT(1 t_c) + Depreciation Capital expenditures- Increases in NWC 10. FCFE = FCFF [Interest expense x (1 t_c)] + Increase in net debt 11. Accounts receivables turnover = Annual credit sales / Average receivables 12. Average collection period = 365 / Accounts receivable turnover 13. D/E ratio = Total liabilities / Shareholders equity

14. Interest coverage ratio = EBIT / Interest expense

15. Inventory turnover ratio = Cost of goods sold / Average inventories 16. Operating profit margin = EBIT / Sales

17. Market (price) to book ratio = Price per share / Book value per share 18. ROA = EBIT / Total assets

19. ROE = Tax burden x Interest burden x profit margin x Total asset turnover x Leverage ratio

20. ROE = Net profit / Equity = (Net profit / Pre-tax profit) x (Pre-tax profit / EBIT) x (EBIT / Sales) x (Sales / Assets) x (Assets / Equity)

21. Leverage ratio = Assets / Equity = 1 + (D/E)

22. ROE = [1 Tax rate] x [ROA + {(ROA Interest rate) x (D/E)}] 23. M² = R*p(adjusted portfolio - i.e., mix of active portfolio and risk-free asset) Rm 24. Sharpe ratio (SR) = [Rp Rf] / p

25. Treynor ratio (TR) = [Rp Rf] / p

26. Jensens alpha () = [Rp Rf] [Rm Rf]

27. Information ratio (IR) = / Residual standard deviation

28. Over-or under-performance against the benchmark (b) = Rp - Rb

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