dc solutions for exam questions on strategic profit model
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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%