Tutorial 6

Question 1
a)i)
Reported EPS for ABC Property Co.
= Net profit after tax / Number of shares
= $32.0 million / 50.0 million shares = $0.64 per share

Reported EPS for XYZ Real Estate Co.

= $40.0 million / 60.0 million shares = $0.67 per share

Recommend ABC Property Co. shares as:

 Reported EPS is above consensus market forecasts i.e. it surprised the market positively
 Although XYZ’s EPS of $0.67 is higher vs. ABC’s $0.64, but much lower than expectations
of $0.75 i.e. negative surprise

Key is to pay attention to how reported earnings compare against market expectations

ii)
Return on Assets (ROA) for ABC Property Co.
= Earnings before interest & tax (or operating profit) / total assets
= $80.0 million / $1,200.00 million
= 0.067 or 6.7%

ROA for XYZ Real Estate Co.

= $70.0 million / $900 million = 0.078 or 7.8%

Recommend XYZ Real Estate Co. shares as its higher ROA suggest XYZ’s management is better
in generating profits from the company’s assets.

iii)
Return on Equity (ROE) for ABC Property Co.
= Net After-tax Profits / Shareholders’ Funds
= $32.0 million / $700.0 million
= 0.046 or 4.6%

ROE for XYZ Real Estate Co.

= $40.0 million / $500.0 million
= 0.08 or 8.0%

Recommend XYZ Real Estate Co. shares as its higher ROE suggest XYZ’s management is
generating better returns on shareholders’ investment.
b)i)
Effective interest rate paid for borrowings by ABC Property Co.
= Interest Expense / Total Borrowings
= Interest Expense / (Total Assets – Shareholders’ Funds)
= $40.0 million / ($1,200.0 - $700.0) million
= 0.08 or 8.0%

Effective interest rate paid by XYZ Real Estate Co.

= $20.0 million / ($900.0 - $500.0) million
= 0.05 or 5.0%

Operating Profit Margin for ABC Property Co.

= Operating Profit / Revenue
= $80.0 million / $500.0 million
= 0.16 or 16%

Operating Profit Margin for XYZ Real Estate Co.

= $70.0 million / $350.0 million
= 0.20 or 20%

c)
Dividend Per Share (DPS) for ABC Property Co.
= EPS x Dividend Payout Ratio
= $0.64 x 60%
= $0.38 per share

DPS for XYZ Real Estate Co.

= $0.67 x 60%
= $0.40 per share

Question 2
a)
20 x 1 20 x 2
ROE = Net Profit / Equity 900,000 1,200,00

2,250,000 3,030,000
0.40 or 40% 0.40 or 39.6%

b) Download Dupont Analysis Excel Sheet

c)
Although both years’ Roe remain unchanged (40%), extended Dupont analysis suggest Cheap-
and-Good Supermarket has improved its operating fundamentals and financial strength:
 Improved asset utilization efficiency
 Higher asset turnover – i.e. Cheap-and-Good Supermarket has been able to sell its goods
faster, without sacrificing EBIT margin
 Need to find how this was achieved and whether the improvement can be sustained
 Supermarket business where goods are commodity-like and difficult to differentiate
against competitors, asset utilisation improvement is likely to be more sustainable rather
than raising selling prices to improve EBIT margins.

 Lower financial leverage and lower interest expense / total assets

 The company has been able to reduce its financial risk without reducing return to
shareholders – this would be perceived favourably by shareholders