Section: C Hamza Imtiaz Roll No: 19L-1613
PAGE 1
Q1. Dupont Analysis
*Return on Equity = Net Income/Total Equity
Net Income/Total Equity * Net Income/Total Equity * Assets/Assets
Net Income/Assets * Assets/Total Equity
83/1052 * 1052/354 = 0.23
ROE= Profit Margin * Total Assets Turnover * Equity Multiplier
Net Income/Sales * Sales/Assets * Assets/Total Equity
83/2200 * 2200/1052 * 1052/354
3.77 * 2.1 * 2.97
23.50%
ROE= ROA * EM
7.9% * 2.97
23.50%
Expanded Dupont Analysis
ROE= Tax Burden * Interest Burden * EBIT Margin * Total Assets Turnover Ratio
* Financial Leverage Ratio
83/127 * 127/161 * 161/2200 * 2200/1052 * 1052/354
23.50%
Net Income is measured after taxes, so if taxes are high this means the company iskeeping more of its
pretax which will result in higher rate of return and in order to achieve high return on equity the
company must reduce its interest and EBIT must be increased because it’s the measure of operating
performance. Here total assets turnover is low related to return on equity. A low total assets turnover
is critical to achieve high ROE. An increase in Debt has magnifying effect on Profitability High EM
results in high ROE. Increase EM means Increase in Interest Expense and Decrease in Interest
Burden, Hence a company must attempt to achieve a good trade off between debt and equity.
Section: C Hamza Imtiaz Roll No: 19L-1613
PAGE 3
Suppose we don’t pay 15.25 Cash Dividend
Equity (S) + Net Income = 354 + 103.75
457.75
Balancing Debt Side
Debt = Equity - Total Debt and Equity
457.75 - 1315
857.25
Pro Forma Balance Sheet : 2019
Assets 1315 Debt 857.25
Equity -457.75
Total 1315 Total 1315
The Percentage of Sales Approach
25% Increase in Growth sales
Assuming 33.33% in Dividends Payout.
SHS INCOME STATEMENT : 2019
Sales 2750
Cost of goods sold 2118.75
Gross profit 631.25
Depriciation 430
EBIT 201.25
Interest 42.5
EBT 158.75
Tax 55
Net Income 103.75
Dividend = 34.58 (33.33%)
Add. To Reatined Earning = 69.17
Dividend Payout Ratio Projected Dividends
= Cash Dividend/Net Income = 103.75 * 1/3= 34.58
= 34.58/103.75 = 103.75 * 2/3= 69.17
=33.33 1/3
Retention Ratio
= Retained earning/Net Income
=69.17/103.75
Section: C Hamza Imtiaz Roll No: 19L-1613
=66.66 2/3
PAGE 5
LIABILITIES
CURRENT LIABILITIES Projected Change from Previous Year
CPLTD 10 0
Bank Loan 350 0
Accounts Payable 278.85 55.85
Accruals 25 0
Total 663.85 55.85
Long term Debt 90 0
Total 753.85 55.85
Owners' Equity
Common Stock 75 0
Retained Earnings 348.17 69.17
Total Debt and Liabilities 1177.02 125.02
External Financing Needed = 137.98
A Particular Scenario
If we don’t borrow any External fundings then we use our Short term and Long term
Borrowings and new equity.
Proforma Balance Sheet (Liability Side)
LIABILITIES
CURRENT LIABILITIES Projected Change
CPLTD 10 0
Bank Loan 557.15 207.15
Accounts Payable 278.85 55.85
Accruals 25 0
Total 871 263
Long term Debt 20.83 -69.17
Total 891.83 193.83
Owners' Equity
Common Stock 75 0
Retained Earnings 348.17 69.17
Total Debt and Liabilities 1315 263
In case SHS decides to borrow needed funds. SHS might choose to borrow some over short term and some over
long term. SHS assets increased by 263, whereas current liabilities rose by only 55.85, so SHS could borrow
263 - 75 = 207.15 inshort term Bank loan and leave total net working capital unchanged. With 137.98 needed,
the remaining 137.98 - 207.15 = -69.17 would have to be from long term borrowings.
Section: C Hamza Imtiaz Roll No: 19L-1613
PAGE 2
Q2. Prepare SHS’s pro-forma balance sheet and income statement for year 2019 assuming 25%
sales growth for the year.
SHS INCOME STATEMENT : 2019
Sales 2750
Cost of Goods Sold 2118.75
Gross Profit 631.25
Depriciation 430
EBIT 201.25
Interest 42.5
EBT 158.75
Tax 55
Net Earnings 103.75
SHS BALANCE SHEET : 2019
CURRENT ASSETS CURRENT LIABILITIES
Cash 56.25 CPLTD 12.5
Account Receivables 263.75 Bank Loan 437.5
Inventories 522.5 Accounts Payable 278.75
Prepaid Expense 35 Accruals 31.25
Total 877.5 Total 760
FIXED ASSETS Long term Debt 112.5
Property and plants 437.5 Total 872
Equity 442.5
TOTAL ASSETS 1315 TOTAL DEBT & EQUITY 1315
Equity = 1315 - 872.5
442.5
Equity Increased = 442.5 - 354
88.5
Dividend as a plug Variable = Net Income - Increase in Equity
103.75 - 88.5
15.25
Cash Dividend = 15.25
Addition to Retained Earnings = 88.5
Section: C Hamza Imtiaz Roll No: 19L-1613
PAGE 4
SHS BALANCE SHEET : 2019
ASSETS
CURRENT ASSETS $ % of Sales
Cash 45 2.05
Account Receivables 211 9.1
Inventories 418 19
Prepaid Expenses 28 1.3
Total 702 31.91
FIXED ASSETS
Property and Plant 350 15.91
Total Assets 1052 47.81
LIABILITIES
CURRENT LIABILITIES $ % of Sales
CPLTD 10 n/a
Bank Loan 350 n/a
Accounts Payable 223 10.14
Accruals 25 n/a
Total 608 n/a
Long term Debt 90 n/a
Total 698 n/a
Owners' Equity
Common Stock 75 n/a
Retained Earnings 279 n/a
Total Debt and Liabilities 1052 n/a
Partial Proforma Balance Sheet : 2019
ASSETS
CURRENT ASSETS Projected Change from Previous Year
Cash 56.38 11.38
Account Receivables 250.25 39.25
Inventories 522.5 104.5
Prepaid Expenses 35.75 7.75
Total 877.5 175.5
FIXED ASSETS
Property and Plant 437.5 87.5
Total Assets 1315 263
Section: C Hamza Imtiaz Roll No: 19L-1613
PAGE 6
Q3. SHS’s potential growth and its financial policy options.
As we can that SHS's potentional growth has beenincreasing year by year and so as their sales and
Net earnings and its also mentioned that this a medium sized family business. In terms of more growth
they need to expand their business through partnerships, joint ventures, mergers and acquisitions.
This can create more shared decision-making and financial management and overall issues to resolve,
there can be clear advantages.
Successful co-operation can deliver:
more resources
sharing of the managerial load
larger skills and fixed asset base
bigger pool of contacts
increase in markets
diversification and organic growth using increased assets and resources
reduced risk of loss
term and some over
HS could borrow
ith 137.98 needed,
