1. Exhibit 10.3 presents historical data for ShipCo, a manufacturer of ships. Based on the data, how has ShipCo performed over the past five years? What is its ROIC for years 2 to 5 (using average invested capital)? What is its operating margin? What is its capital turnover? Is it creating more or less value over time? Assume an operating tax rate of 30 percent and a cost of capital of 9 percent.
2. Using the data presented in Question 1, decompose operating margin and capital turnover. What has been occurring at ShipCo over the five-year period? What might be driving these results?

Exhibit 10.13 Ship Co: Income Statement and Balance Sheet $ million Year 2 Year 3 Year 5 Year 3 Year 1 10.6 102.8 Year 1 530.0 (344.5) (79.5) (15.9) 90.1 (7.5) Income statement Revenues Cost of sales Selling, general, and administrative Depreciation EBIT Interest expense Gain/(loss) on sale of assets Earnings before taxes Taxes Net income Year 4 661.1 (439.6) (92.6) (19.8) 109.1 (7.5) 12.0 111.2 93.2 Balance sheet Operating cash Excess cash and marketable securities Accounts receivable Inventory Current assets 601.0 (396.7) (87.1) (18.0) 99.2 (7.5) Year 2 11.1 108.9 80.7 183.6 384.3 79.5 674.3 (451.8) (107.9) (20.2) 94.4 (7.5) Year 4 Year 5 13.2 13.5 118.2 139.8 99.2 97.8 231.4 242.8 462.0 493.8 204.3 556.5 (364.5) (86.3) (16.7) 89.0 (7.5) (10.0) 71.5 (21.5) 50.1 169.6 362.5 420.7 219.8 240.4 Property, plant, and equipment Equity investments 206.7 180.0 267.8 180.0 276.5 180.0 180.0 180.0 82.6 (24.8) 57.8 91.7 (27.5) 64.2 101.6 (30.5) 71.1 86.9 (26.1) 60.8 Total assets 749.2 784.2 841.1 909.8 950.3 Dividends 17.3 17.0 18.0 17.8 18.3 Accounts payable Short-term debt Accrued expenses Current liabilities 116.6 45.0 90.1 119.6 45.0 126.2 45.0 93.2 264.4 135.5 45.0 99.2 279.7 134.9 45.0 97.8 277.6 89.0 251.7 253.7 105.0 Long-term debt Common stock Retained earnings 100.0 292.5 105.0 100.0 325.5 105.0 100.0 371.7 105.0 100.0 425.1 105.0 100.0 467.6 Total liabilities and equity 749.2 784.2 841.1 909.8 950.3 Exhibit 10.13 Ship Co: Income Statement and Balance Sheet $ million Year 2 Year 3 Year 5 Year 3 Year 1 10.6 102.8 Year 1 530.0 (344.5) (79.5) (15.9) 90.1 (7.5) Income statement Revenues Cost of sales Selling, general, and administrative Depreciation EBIT Interest expense Gain/(loss) on sale of assets Earnings before taxes Taxes Net income Year 4 661.1 (439.6) (92.6) (19.8) 109.1 (7.5) 12.0 111.2 93.2 Balance sheet Operating cash Excess cash and marketable securities Accounts receivable Inventory Current assets 601.0 (396.7) (87.1) (18.0) 99.2 (7.5) Year 2 11.1 108.9 80.7 183.6 384.3 79.5 674.3 (451.8) (107.9) (20.2) 94.4 (7.5) Year 4 Year 5 13.2 13.5 118.2 139.8 99.2 97.8 231.4 242.8 462.0 493.8 204.3 556.5 (364.5) (86.3) (16.7) 89.0 (7.5) (10.0) 71.5 (21.5) 50.1 169.6 362.5 420.7 219.8 240.4 Property, plant, and equipment Equity investments 206.7 180.0 267.8 180.0 276.5 180.0 180.0 180.0 82.6 (24.8) 57.8 91.7 (27.5) 64.2 101.6 (30.5) 71.1 86.9 (26.1) 60.8 Total assets 749.2 784.2 841.1 909.8 950.3 Dividends 17.3 17.0 18.0 17.8 18.3 Accounts payable Short-term debt Accrued expenses Current liabilities 116.6 45.0 90.1 119.6 45.0 126.2 45.0 93.2 264.4 135.5 45.0 99.2 279.7 134.9 45.0 97.8 277.6 89.0 251.7 253.7 105.0 Long-term debt Common stock Retained earnings 100.0 292.5 105.0 100.0 325.5 105.0 100.0 371.7 105.0 100.0 425.1 105.0 100.0 467.6 Total liabilities and equity 749.2 784.2 841.1 909.8 950.3