Below are the last three years financial statements of Sentec Inc., a distributor of electrical fixtures. a.

Below are the last three years’ financial statements of Sentec Inc., a distributor of electrical fixtures.

a. Compute Sentec Inc.’s working capital requirement (WCR) and prepare its managerial balance sheets at Year-end 1, Year-end 2, and Year-end 3.
b. Compute Sentec’s operating margin, invested capital turnover, return on capital employed, financial cost ratio, financial structure ratio, and the tax effect in Year 1, Year 2, and Year 3. What is the relationship between these ratios and Sentec’s return on equity (ROE) over the three-year period?
c. What accounts for the change in the firm’s ROE over the three-year period?
d. In Year 3, firms in the same business sector as Sentec Inc. had an average collection period of thirty days, an average payment period of thirty-three days, and an inventory turnover of eight days. Suppose Sentec Inc. had managed its operating cycle like the average firm in the sector. What would its WCR, managerial balance sheet, operating margin, invested capital turnover, return on capital employed, financial cost ratio, financial structure ratio, and the tax effect have been in Year 3? Its ROE? Assume a ratio of interest expense to earnings before interest and tax of 4 percent, and an effective tax rate of 40 percent.

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Income Statements (in thousands) Year 1 Year 2 Year 3 $22,100 $24,300 $31,600 25,100 5,000 150 1,350 260 1,090 430 $ 320 460 660 $180 200 200 Net sales 17,600 3,750 100 650 110 540 220 19,300 4,000 100 900 130 770 310 Cost of goods sold Selling, general, and administrative expenses Depreciation expense Earnings before interest and tax Earnings before tax Earnings after tax Net interest expensoe Income tax expense Dividends Balance Sheets (in thousands) Year 1 December 31 December 31 350 3,100 December 31 S 600 2,730 2,800 $300 4,200 4,300 Accounts receivable Inventories Prepaid expenses Net fixed assets Total assets Short-term debt Accounts payable Accrued expenses Long-term debt Owners' equity Total liabilities and owners' equity 1,300 S7.950 500 1,600 260 1,200 4,390 $7,950 1,450 S10,250 S 1,900 2,050 350 1,100 4,850 S10,250 1,200 S 300 1,400 1,300 4,130 S7,330