MIRANDA, SHARMAINE C.

BSA-3A

QUESTION 1
Below are the historical data for ShipCo, a manufacturer of ships. Based on the data, how has
ShipCo performed over the past five years? What is its ROIC for years 2 to 5 (using average
invested capital)? What is its operating margin? What is its capital turnover? Is it creating more
or less value over time? Assume an operating tax rate of 30 percent and cost of capital of 9
percent. Answer this using Microsoft Excel.
As it is obser
more than pr
though increa
declining. Th
of a steady r
This is clearl
operating exp
 ANSWER:
Year 1 2 3 4 5
a, how hasNet Income 57.8 50.1 64.2 71.1 60.8
ng average
eating moreSales 530 556.5 601 661.1 674.3
capital of 9Profit margin 10.91% 9.00% 10.68% 10.75% 9.02%

As it is observed that the profit margin is declining since the start of the analysis. This indicates a
more than proportional increase in expenses of the business. The ROIC as per workings below
though increased in years 3 and 4 declined in Year 5. The operating margin has also been steadily
declining. The capital turnover ratio shows a declining trend as per workings below. Thus, in spite
of a steady rise in sales, the company has been unable to increase value for its shareholders.
This is clearly due to a deep fall in operating margin of the business. ShipCo. needs to check its
operating expenses.

ROIC
Year 1 2 3 4 5
Opening capital 392.5 425.5 471.7 525.1
Closing capital 425.5 471.7 525.1 576.6
Average capital 409 448.6 498.4 550.85
ROIC= Net income/
12.25% 14.31% 14.27% 11.04%
Average capital
s. This indicates a
er workings below
also been steadily
ow. Thus, in spite
its shareholders.
needs to check its
MIRANDA, SHARMAINE C.
BSA-3A

QUESTION 2
Using the data presented in Question 1, decompose operating margin and capital turnover. What
has been occurring at ShipCo over the five-year period? What might be driving these results?

Operating Margin
Year 1 2 3 4 5
EBIT 90.1 89 99.2 109.1 94.4
Sales 530 556.5 601 661.1 674.3
Operating margin 17.00% 15.99% 16.51% 16.50% 14.00%

Year 1 2 3 4 5
Capital turnover ratio =
1.360636 1.339724 1.326445 1.224108
Sales/ Average capital
MIRANDA, SHARMAINE C.
BSA-3A

QUESTION 3
Decompose the ratio of operating working capital to sales for ShipCo into operating-cash days,
accounts-receivable days, inventory days, accounts payable days, and accrued-expenses days.
(For comparability, use sales in all calculations.) Compare these results with those in data below
for DefenseCo, a large diversified defense contractor. Which firm is showing a better trend in its
management of its working capital? What might explain the differences in these variables? Do
this using Microsoft Excel.

ANSWER:
Operating Capital= Operating cash + Accounts
Working capital of

Sales

Operating cash

Accounts Receivable

Inventory

Accounts Payable

Accrued Expense

Operating Working
Capital

Operating Cash to
sales
Accounts Receivable
to sales
Inventory to sales
Accounts Payable to
sales
Accrued expense to
sales
Operating Working
Capital to sales
 CONCLUSION:
erating-cash days,
ed-expenses days. Operating capital to sales for Defense Company is consistent for all the ye
hose in data below the Ship Company is consistently increasing. Hence, Ship Company working
increasing trend. The difference in these variables is because the Ship Com
a better trend in its
trend. It is increasing in all years whereas the sales of Defense Company is
ese variables? Do

apital= Operating cash + Accounts Receivable + Inventory – Accounts Payable – Accrued Expense
Defense Company Statement ratio o
Working capital of Ship Company
capital of sales
Year 1 Year 2 Year 3 Year 4 Year 5
Operating working
530 556.5 601 661.1 674.3
capital
Operating working
10.6 11.1 12 13.2 13.5
capital/ Sales%
79.5 80.7 93.2 99.2 97.8 Sales = (a/b)

169.5 183.5 204.3 231.4 242.8 Operating cash

Accounts
116.6 129.6 126.2 135.5 134.9
Receivable

90.1 89 93.2 99.2 97.8 Inventory

53 66.8 90.1 109.1 121.4 Accounts Payable

Accrued expense

0.02 0.0199 0.02 0.02 0.02

Operating cash to
0.15 0.145 0.1551 0.1501 0.145
sales
Accounts
0.32 0.3299 0.3399 0.35 0.3501
Receivable to sales
0.22 0.2149 0.21 0.205 0.2001 Inventory to sales
Accounts payable
0.17 0.1599 0.1551 0.1501 0.145
to sales
Accrued expense to
0.1 0.32 0.1499 0.165 0.18
sales

Operating working
capital to sales
 pany is consistent for all the years. Whereas, the ratio of
g. Hence, Ship Company working capital to sales is having
iables is because the Ship Company sales is in increasing
e sales of Defense Company is not increasing in majority.

se Company Statement ratio of operating working

capital of sales
Year 2 Year 3 Year 4 Year 5
11.3 10.4 11.4 11.3

3.1 2.9 3.1 3.1

364.57 358.62 367.74 364.57

7.1 7.1 7.1 7.1

42.1 41.8 42.7 42.5

92.3 91.6 91.5 92.6

70.2 70.1 70.4 71.1

60 60 59.8 59.8

0.0195 0.01 0.0193 0.0195

0.1155 0.1166 0.1161 0.1166

0.2532 0.2554 0.2595 0.254

0.1926 0.1955 0.1914 0.1951

0.1646 0.1673 0.1626 0.1641

0.031 0.029 0.031 0.031