Question 1 [15 marks] Show calculations no excel

Statement of Comprehensive Income as of December 31, 2015

Heavy Metal Manufacturing (HMM) Metallic /stamping Inc. (MS) High-Tech Software Co. (HTS)

Sales R 75 000 000 R 50 000 000 R 100 000 000

Operating Expenses R 65 000 000 R 40 000 000 R 60 000 000

Operating Profit R 10 000 000 R 10 000 000 R 40 000 000

Interest Expenses R 3 000 000 R 3 000 000 R 0

Earnings before taxes R 7 000 000 R 7 000 000 R 40 000 000

Taxes (40%) R2 800 000 R 2 800 000 R 16 000 000

Net Income R 4 200 000 R 4 200 000 R 24 000 000

Statement of Financial Position as of December 31, 2015

Heavy Metal Manufacturing (HMM) Metallic /stamping Inc. (MS) High-Tech Software Co. (HTS)

Current Assets R 10 000 000 R 5 000 000 R 20 000 000

Net Fixed Assets R 90 000 000 R 75 000 000 R 80 000 000

Total Assets R 100 000 000 R 80 000 000 R 100 000 000

Current Liabilities R20 000 000 R 10 000 000 R 10 000 000

Long-term debt R40 000 000 R 40 000 000 R 0

Total liabilities R 60 000 000 R 50 000 000 R 10 000 000

Common stock R 15 000 000 R 10 000 000 R 25 000 000

Retained earnings R 25 000 000 R 20 000 000 R 65 000 000

Total common equity R 40 000 000 R 30 000 000 R 90 000 000

Total liabilities and common equit R 100 000 000 R 80 000 000 R 100 000 000

Use the DuPont system to compare the two heavy metal companies shown above (HHM and MS) during 2015.

a. Which of the two has a higher return on common equity? What is the cause of the difference between the two? (7)

b. Calculate the return on common equity of the software company HTS. Why is this value so different from those of the heavy metal companies calculated in part (a)? (2)

c. Compare the leverage levels between the industries. Which industry receives a greater contribution from the financial leverage as measured by assets-to-equity (A/E) ratio? (4)

d. Can you make a meaningful DuPont comparison across industries? Why or why not? (2)