Question

7 Marks Question 2 For 2004, use the reformatted financial statements below to compute the return on equity. Next compute the five Advanced du Pontratos the spread and the financing impact on retum on equity. (Please do not average the balance sheet numbers.) Briefly identify the activity that is pushing down profitability REFORMATTED CONSOLIDATED INCOME STATEMENT 2,002 2,003 2,004 FOR THE YEAR ENDED 30 JUNE $.000 $.000 $,000 REVENUE AND OTHER INCOME Scheduled revenues 550,991 731,951 924,566 Other revenues 73,059 110,557 149,658 Revenue total 624,050 842,508 1,074, 224 Foreign exchange realised gains 975 628 3,217 Gain on disposal of fixed assets 527 Revenue and other income in total 625,552 843,136 1,077.441 EXPENDITURE Staff costs -78,240 -93,073 -123,624 Depreciation and amortization -59,010 -76,865 -101,391 Amortisation of goodwill -2,342 (Loss) on disposal of fixed assets -29 -323,867 Other expenses -597,922 -409,096 Expenditure in total -461,117 -825,288 -579,063 Operating (Loss) Profit before income tax expense and net finance 164,435 264,073 252,153 expense Income tax benefit (expense) -19,220 -30,155 -24,985 Other comprehensive Income 145,215 239,088 221.998 Net Profit After Tax (NOPAT) 310 5,160 Net Finance Expense after tax (NFEat) -15,387 150,375 COMPREHENSIVE INCOME 206,611 239,398 Page 3 of 11

Answer 1

The financing impact on Roe can be analyzed with the help of financial leverage or Equity multiplier ratio. The company's ROE is 14% majorly because of Debt in the financial structure.

The operating profit margin is quite low which seems to be the reason of low profitability.

ROE Net income for shareholders Equity PM 1455289 - 0.14 2 Dupont Ratio (i) operating Profit margin 252 153 CBIT Sales run Asset turnover sales Asset - 924566 2938988 = 0.314 Interest Expense lui interest expensee Rate = Assets Interest before tax benefits assets 17485 2938988 = 0.0.05 * Tax Rate = income tax expense Profit before interest and tax - - 30155 - 0.12 17485 252153 A Interest expense before tax = .15387 = T-0.12 as Equity Multiplier - Assets Equity 2938988 1455288 -2.02

E v) Tax Retention Rate - I- Tax Rate - 1 - 0.12 - 0.88