Comments on: Business Finance? http://understandingbusinessfinance.com/business-finance/business-finance-6/ Demystifying business finance with questions and answers Fri, 18 May 2012 09:29:17 +0000 http://wordpress.org/?v=2.7 hourly 1 By: Someguy http://understandingbusinessfinance.com/business-finance/business-finance-6/comment-page-1/#comment-283 Someguy Sun, 23 Oct 2011 11:26:34 +0000 http://understandingbusinessfinance.com/business-finance/business-finance-6/#comment-283 Intuitively, since the main difference is that A invested less in current assets, we know A has less assets and also less equity (equity = asset - debt = assets * (1-60%)). So since both have the same income, A has a higher ROE. The details: ROE = return/equity = net profit / assets - liabilities net profit = EBIT - interest - taxes EBIT = earning before interest and taxes EBIT = $1.2m * 12% = $144k interest = $1.2m * 10% = $120k EBT = $144k-120k=24k taxes = 24k*35%= $8.4 net profit = $15600 assets = current assets + fixed assets A current assets = 40% sales = (assumed) 40% EBIT = $57.6k B current assets = 55% sales = (assumed) 55% EBIT = $79.2k A assets = $57.6k + $1.2m = $1.2576m B assets = $79.2k + $1.2m = $1.2792m liabilities = (assumed) debt = assets * 60% A liabilities = $1.2576m * 60% = $754.56k B liabilities = $1.2792m * 60% = $767.52k ROE = $15600 / assets-liabilities A ROE = $15600 /($1.2576m-$754.56k) =$15600/503,040=3.101% B ROE = $15600 /($1.2792m-$767.52k) =$15600/511,680=3.049% Intuitively, since the main difference is that A invested less in current assets, we know A has less assets and also less equity (equity = asset - debt = assets * (1-60%)). So since both have the same income, A has a higher ROE.

The details:

ROE = return/equity = net profit / assets - liabilities

net profit = EBIT - interest - taxes
EBIT = earning before interest and taxes
EBIT = $1.2m * 12% = $144k
interest = $1.2m * 10% = $120k
EBT = $144k-120k=24k
taxes = 24k*35%= $8.4
net profit = $15600

assets = current assets + fixed assets
A current assets = 40% sales = (assumed) 40% EBIT = $57.6k
B current assets = 55% sales = (assumed) 55% EBIT = $79.2k
A assets = $57.6k + $1.2m = $1.2576m
B assets = $79.2k + $1.2m = $1.2792m

liabilities = (assumed) debt = assets * 60%
A liabilities = $1.2576m * 60% = $754.56k
B liabilities = $1.2792m * 60% = $767.52k

ROE = $15600 / assets-liabilities
A ROE = $15600 /($1.2576m-$754.56k)
=$15600/503,040=3.101%
B ROE = $15600 /($1.2792m-$767.52k)
=$15600/511,680=3.049%

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