dc solutions for exam questions on strategic profit model

Solutions for Exam Questions on

Strategic Profit Model

Strategic Profit Model

Exhibit 2.1

Nov 2007

Raffles Apparel Mart• Don’t waste time calculating the net profit margin

and the asset turnover margins as they both multiply out to become the Return on Assets ratio

• Return on Assets = net profit / total assets= 7983 / 76 500

• Financial Leverage = total assets / net worth = 76 500 / 35 879

• Therefore return on net worth = net profit /net worth = 7983 / 35 879 = 22.25%

Singapore Status Clothiers

• Return on Assets = net profit / total assets= 1679 / 9400

• Financial Leverage = total assets / net worth = 9400 / 6044

• Therefore return on net worth = net profit /net worth = 1679 / 6044 = 27.78%

• Therefore SSC has a higher return

October 2006

Need to work out the Return on Assets ratios:

X

=Return on

Assets Ratios

Computations of Return on Net Worth

Company Net profit margin

Asset Turnover

Return on

Assets

Financial Leverage

Return on Net Worth

SRS 3.4 0.65 2.21 5.52 12.2

KC 2.7 2.31 6.24 2.52 15.7

WG 3.9 3.11 12.1 2.27 27.5

ZZS 2.3 2.84 6.5 2.98 19.5

MDB 2.8 1.24 3.47 2.42 8.4

( c ) If SRS were to raise its asset turnover ratio to the average of the four retailers:

• Average asset turnover ratio of the other four retailers = (2.31+3.11+2.84+1.24) / 4 = 2.38

• Therefore the revised Return on Net Worth– Return on assets = 2.38 x 3.4 = 8.1– Financial leverage = 5.52 (no change)

– Therefore RONW = 8.1 x 5.52 = 44.67%

( d ) If ZZS achieve same net profit margin as WG

• Same net profit margin as WG = 3.9

• Therefore the revised Return on Net Worth– Return on assets = 3.9 x 2.84 = 11.08

– Financial leverage = 2.98 (no change)– Therefore RONW = 11.08 x 2.98 = 33.02%

( e ) If MDB were to raise its financial leverage to the same level as KCS

• New Financial Leverage = 2.52

• Therefore the revised Return on Net Worth= 3.47 x 2.52 = 8.75%