Hi Radhika,

Could you please help answer question 5 in the attached document?

Evaluating Pacific Brands Limited and HanesBrands, Inc. Jill Perry, one of your classmates, has a third (and deciding) interview with Laskin Consulting Group for a permanent position. When Bill Weller invited Jill for the third interview, he told her that a significant portion of the interview would be devoted to assessing her ability to interpret, explain, and use financial ratios and metrics. In a follow-up e-mail, Bill sent Jill the information in Exhibit A, stating, \"The financial analysis portion of your interview will be based on the attached information for Pacific Brands Limited and HanesBrands, Inc. We are providing this information prior to your interview to give you time to think about the financial ratios and metrics. However, we do not want you to access any additional information about either company. Doing so will disqualify you for a position with our company.\" After reviewing the information, Jill developed a list of questions she thought she could be asked in the interview. Jill has come to you for help in reviewing the questions. Questions: Base your answers for questions 1 through 5 on the financial ratios and metrics under Approach 2. 1. Which company performed better in fiscal 2010? 2. Why was Hanesbrands' fiscal 2010 ROE greater than Pacific Brands'? 3. For each financial ratio and metric, explain what that ratio or metric measures. Consistent with Jill's need to impress the interviewer, your explanation should be in everyday language, but it also needs to be thorough, precise, and concise. Your goal is to have an explanation in your own words that is simple enough for your grandparents to understand, but is sufficiently accurate, thorough, and precise to use in a business setting. 4. Is it feasible for Pacific Brands to increase its return on assets (ROA) so that its fiscal 2011 ROA is greater than or equal to Hanesbrands' fiscal 2010 ROA? 5. Assume that on the first day of fiscal 2011 Pacific Brands increased its leverage to Hanesbrands' level of leverage and maintained that level of leverage throughout fiscal 2011. In this situation, do you think that Pacific Brands' fiscal 2011 ROE would be greater than, less then, or equal to Hanesbrands' fiscal 2010 ROE? Justify your answer. 6. The ratios and metrics presented in Exhibit A are calculated using two different approaches. Why are there two approaches for calculating the financial ratios and metrics and which should be used to analyze the two companies? Frederickson Page 1 Evaluating Pacific Brands Limited and HanesBrands, Inc. Exhibit A Pacific Brands Limited is an Australian company that manufactures, sources, markets, and sells consumer lifestyle brands across underwear, socks, hosiery, sleepwear, intimate apparel, footwear, bed linen, bedding accessories, bedding, carpet underlay, foams, corporate uniforms, workwear, streetwear, lifestyle apparel and sporting goods. The company's brands include Bonds, Jockey, Berlei, Dunlop, Everlast, Naturalizer, Clarks, Hush Puppies, and Volley. It sells its products predominantly in Australia and the Asia Pacific region, but also markets and distributes underwear, intimates, footwear, workwear and bed linen in the UK, US, and Europe.1 HanesBrands, Inc. is a US company that designs, manufactures, sources and sells a broad range of apparel essentials such as T-shirts, bras, panties, men's underwear, kids' underwear, casualwear, activewear, socks and hosiery. The company's three largest and most recognizable brands are Hanes, Champion, and Playtex. Other brands include Bali, L'eggs, Just My Size, Wonderbra, Stedman, Outer Banks, Zorba, Rinbros and Duofol. HanesBrands sales are primarily wholesale sales to retailers, but it also has retail operations through its value-based outlet stores, Internet operations and catalogs.2 The tables on the next page contain selected financial ratios and metrics for each company, calculated using two different approaches. With Approach 1, the ratios and metrics are based on the dollar amounts reported in the companies' respective financial statements; with Approach 2, the ratios and metrics are based on pro forma income statements that exclude certain items for both companies (e.g., restructuring charges and asset impairments). 1 2 Background information on Pacific Brands Limited is from www.investsmart.com.au/shares/asx/PacificBrands-PBG.asp and www.corporateinformation.com/Company-Snapshot.aspx?cusip=C0369X400 Background information on HanesBrands, Inc. is from www.reuters.com/finance/stocks/companyProfile?symbol=HBI and business.highbeam.com/companyprofiles/info/1340576/hanesbrands-inc Frederickson Page 2 Evaluating Pacific Brands Limited and HanesBrands, Inc. Pacific Brands ROE Approach 1 2010 2009 0.0383 (0.1857) Approach 2 2010 2009 0.0631 0.0739 Asset turnover Operating efficiency Interest efficiency Leverage 0.8342 0.0497 0.6085 1.5177 0.8806 (0.0871) 1.3729 1.7625 0.8342 0.0693 0.7191 1.5177 0.8806 0.0701 0.6795 1.7625 Average receivable collection period Average inventory holding period Average payable payment period Cash conversion cycle PP&E turnover Intangible asset turnover 40.70 86.37 42.76 84.31 14.89 1.33 43.12 99.35 37.46 105.01 13.57 1.48 40.70 86.37 42.76 84.31 14.89 1.33 43.12 99.35 37.46 105.01 13.57 1.48 Common-size income statement: Sales Cost of sales Gross profit Selling, general & administrative Freight and distribution Other income (expense), net Interest income (expense), net Income before income taxes Income taxes Net income 100.00% (58.52%) 41.48% (24.48%) (7.27%) (2.41%) (2.77%) 4.55% (1.50%) 3.05% 100.00% (58.38%) 41.62% (24.74%) (7.19%) (18.79%) (3.22%) (12.32%) 0.37% (11.95%) 100.00% (58.52%) 41.48% (24.48%) (7.27%) 0.54% (2.77%) 7.50% (2.47%) 5.03% 100.00% (58.38%) 41.62% (24.74%) (7.19%) 0.63% (3.22%) 7.10% (2.34%) 4.76% HanesBrands, Inc. ROE Approach 1 2010 2009 0.1532 0.6868 Approach 2 2010 2009 0.2983 0.9672 Asset turnover Operating efficiency Interest efficiency Leverage 1.1698 0.0501 0.2630 9.9384 1.2022 0.0584 0.5125 19.0870 1.1698 0.0584 0.4395 9.9384 1.2022 0.0677 0.6226 19.0870 Average receivable collection period Average inventory holding period Average payable payment period Cash conversion cycle PP&E turnover Intangible asset turnover 42.26 145.83 48.92 139.17 6.46 8.49 34.79 164.05 44.13 154.70 7.22 9.05 42.26 145.83 48.92 139.17 6.46 8.49 34.79 164.05 44.13 154.70 7.22 9.05 Common-size income statement: Sales Cost of sales Gross profit Selling, general & administrative Freight and distribution Other income (expense), net Interest income (expense), net Income before income taxes Income taxes Net income 100.00% (67.48%) 32.52% (24.17%) 0.00% (2.65%) (4.20%) 1.50% (0.18%) 1.32% 100.00% (67.58%) 32.42% (23.76%) 0.00% (1.17%) (3.65%) 3.84% (0.84%) 2.99% 100.00% (67.16%) 32.84% (24.09%) 0.00% (1.27%) (4.20%) 3.29% (0.72%) 2.57% 100.00% (66.58%) 33.42% (23.76%) 0.00% 0.01% (3.65%) 6.02% (1.81%) 4.22% Frederickson Page 3