Hasbro is a leading firm in the toy, game, and amusement industry. Its promoted brands group includes products from Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger, and Wizards of the Coast. Sales of toys and games are highly variable from year to year depending on whether the latest products meet consumer interests. Hasbro also faces increasing competition from electronic and online games. Hasbro develops and promotes its core brands and manufactures and distributes products created by others under license arrangements. Hasbro pays a royalty to the creator of such products. In recent years, Hasbro has attempted to reduce its reliance on license arrangements, placing more emphasis on its core brands. Hasbro also has embarked on a strategy of reducing fixed selling and administrative costs in an effort to offset the negative effects on earnings of highly variable sales. Exhibit (2.1) presents the balance sheets for Hasbro for the years ended December 31, Years 1 through 4. Exhibit (2.2) presents the income statements and Exhibit (2.3) presents the statements of cash flows for Years 2 through 4. Exhibit (2.1) Hasbro Balance Sheets (amounts in millions) Year 4 Year 3 Year 2 Year 1 Assets Cash $ 725 S521 $ 496 $ 233 Accounts receivable 579 607 555 572 Inventories 195 169 190 217 Prepayments 219 212 191 346 Total Current Assets $ 1,718 S 1,509 $ 1,432 $ 1,368 Property, plant, and equipment, net 207 200 213 236 Other assets 1,316 1.454 1,498 1.765 Total Assets S 3,241 S3,163 $3,143 S 3,369 Liabilities and Shareholders' Equity Accounts payable S 168 S 159 $ 166 S 123 Short-term borrowing 342 24 223 36 Other current liabilities 639 747 578 599 Total Current Liabilities $ 1,149 S 930 $ 967 $ 758 Long-term debt 303 687 857 1,166 Other non-current liabilities 149 141 128 92 Total Liabilities $ 1,601 $ 1.758 $ 1,952 S 2,016 Common stock S 105 $ 105 $ 105 $ 105 Additional paid-in capital 381 398 458 455 Retained earnings 1,721 1,567 1,430 1,622 Accumulated other comprehensive income (loss) 82 30 (47) (68) Treasury stock (649) (695) (755) (761) Total Shareholders' Equity $ 1,640 $ 1,405 $ 1,191 $1,353 Total Liabilities and Shareholders' Equity $3,241 S 3,163 S 3,143 S3,369 Exhibit (2.2) Year 2 $ 2.816 (1,099) Hasbro Income Statements famounts in millions) Year 4 Year 3 Sales $ 2.998 S 3.139 Cost of goods sold (1.252) (1,288) Selling and administrative expenses: Advertising (387) (364) Research and development (157) (143) Royalty expense (223) (248) Other selling and administrative expenses (687) (799) Interest expense (32) (53) Income tax expense (64) (69) Net Income S 196 S 175 (297) (154) (296) (788) (78) (29) S75 Exhibit (2.3) Hasbro Statements of Cash Flows (amounts in millions) Year 4 Year 3 Year 2 Operations Net income S 196 S 175 $ 75 Depreciation and amortization 146 164 184 Addbacks and subtractions, net 17 68 (67) (Increase) Decrease in accounts receivable 76 (13) 34 (Increase) Decrease in inventories (16) 35 39 (Increase) Decrease in prepayments 29 8 185 Increase (Decrease) in accounts payable and other current (90) 17 23 liabilities Cash Flow from Operations S 358 S 454 $ 473 Investing Property, plant, and equipment acquired S (79) S (63) S (59) Other investing transactions (6) (2) (3) Cash Flow from Investing S(85) S (65) S (62) Financing Increase in common stock S3 S 40 S3 Decrease in short-term borrowing (7) (15) Decrease in long-term borrowing (58) (389) (127) Acquisition of common stock (3) Dividends (37) (21) (21) Other financing transactions 7 9 12 Cash Flow from Financing S (69) S (364) S (148) Change in Cash $ 204 $ 25 S 263 Cash - Beginning of Year 521 496 233 Cash - End of Year S 725 S 521 $ 496 Required: a. Exhibit (2.4) presents profitability ratios for Hasbro for Year 2 and Year 3. Calculate cach of these financial ratios for Year 4. The income tax rate is 35%. b. Analyze the changes in ROA and its components for Hasbro over the three-year period, suggesting reasons for the changes observed. c. Analyze the changes in ROCE and its components for Hasbro over the three-year period, suggesting reasons for the changes observed. ? Exhibit (2.4) Hasbro Financial Statement Ratio Analysis Year 4 Profit margin for ROA ? Assets turnover ? ROA ? Profit margin for ROCE Capital structure leverage ? ROCE Cost of goods sold / Sales Advertising expense / Sales ? Research and development expense / Sales ? Royalty expense / Sales ? Other selling and administrative expense / Sales ? Income tax expense (excluding tax effects of interest expense) / Sales ? Accounts receivable turnover ? Inventory turnover ? Fixed assets turnover ? 2 2 Year Year 3 2 6.7% 4.5% 1.0 0.9 6.6% 3.9% 5.6% 2.7% 2.4 2.6 13.5% 5.9% 41.0% 39.0% 11.6% 10.5% 4.6% 5.5% 7.9% 10.5% 25.4% 28.0% 2.8% 2.0% 5.4 5.0 7.2 5.4 15.2 12.5