Need Help With My Finance Class Assignment
Need Help With My Finance Class Assignment On The Following Using The
Need help with my finance class assignment on the following using the company Parker Hannifin: Pro Forma financial statements (Balance Sheet and Income Statement) for the next fiscal year, assuming a 10 percent growth rate in sales and Cost of Goods Sold (COGS) for the next year. A calculation of Return on Equity (ROE) using the DuPont systems. Assessment of management performance by calculating Economic Value Added (EVA).
Paper For Above instruction
This paper aims to provide a comprehensive financial analysis of Parker Hannifin by developing projected (Pro Forma) financial statements for the upcoming fiscal year, calculating key performance metrics such as Return on Equity (ROE) using DuPont analysis, and evaluating management performance through Economic Value Added (EVA). These analyses will offer insights into the company's future financial health, operational efficiency, and value creation for shareholders.
Pro Forma Financial Statements
The foundation of this analysis involves constructing Pro Forma financial statements—specifically, the Income Statement and Balance Sheet—for Parker Hannifin based on a 10% growth rate in sales and Cost of Goods Sold (COGS). To do this accurately, historical financial data from the most recent fiscal year must be used as a baseline. For illustration purposes, assume that Parker Hannifin reported the following key figures for the last fiscal year:
- Sales: $13 billion
- COGS: $8.5 billion
- Operating Expenses: $3 billion
- Interest Expense: $200 million
- Income Taxes: $480 million
- Net Income: $1.8 billion
- Total Assets: $16 billion
- Total Equity: $7 billion
Applying a 10% growth rate:
1. Estimate next year's sales:
\[
\text{Sales} = 13\, \text{billion} \times 1.10 = 14.3\, \text{billion}
\]
2. Estimate next year's COGS:
\[
\text{COGS} = 8.5\, \text{billion} \times 1.10 = 9.35\, \text{billion}
\]
3. Estimate operating expenses, interest, and taxes proportionally:
Assuming operating expenses grow proportionally (for simplicity):
\[
\text{Operating Expenses} = 3\, \text{billion} \times 1.10 = 3.3\, \text{billion}
\]
For interest and taxes, using previous ratios:
- Interest expense ratio: \(\frac{200\, \text{million}}{13\, \text{billion}} \approx 1.54\%\)
- Taxes: \(\frac{480\, \text{million}}{13\, \text{billion}} \approx 3.69\%\)
Therefore:
\[
\text{Interest Expense} = 14.3\, \text{billion} \times 1.54\% \approx 220\, \text{million}
\]
\[
\text{Income Taxes} = (Earnings before taxes) \times 3.69\%
\]
Next, we determine the projected earnings:
- Gross Profit:
\[
\text{Gross Profit} = \text{Sales} - \text{COGS} = 14.3\, \text{billion} - 9.35\, \text{billion} = 4.95\, \text{billion}
\]
- Operating Income:
\[
\text{Operating Income} = \text{Gross Profit} - \text{Operating Expenses} = 4.95\, \text{billion} - 3.3\, \text{billion} = 1.65\, \text{billion}
\]
- Earnings Before Taxes (EBT):
\[
\text{EBT} = \text{Operating Income} - \text{Interest Expense} = 1.65\, \text{billion} - 220\, \text{million} \approx 1.43\, \text{billion}
\]
- Net Income:
\[
\text{Net Income} = \text{EBT} - \text{Taxes}
\]
taxes:
\[
\text{Taxes} = 1.43\, \text{billion} \times 3.69\% \approx 53\, \text{million}
\]
\[
\text{Net Income} \approx 1.43\, \text{billion} - 53\, \text{million} \approx 1.377\, \text{billion}
\]
Thus, the projected Income Statement for the next year would show:
| Item | Amount (in billions) |
|-------|---------------------|
| Sales | 14.3 |
| COGS | 9.35 |
| Gross Profit | 4.95 |
| Operating Expenses | 3.3 |
| Operating Income | 1.65 |
| Interest Expense | 0.22 |
| Earnings Before Taxes | 1.43 |
| Income Taxes | 0.053 |
| Net Income | 1.377 |
Projected Balance Sheet
Assuming that assets and equity grow proportionally, and considering the retained earnings increase by net income, the projected balance sheet figures are:
- Assets:
\[
\text{Total Assets} = 16\, \text{billion} \times 1.10 = 17.6\, \text{billion}
\]
- Equity:
\[
\text{Total Equity} = \text{Previous Equity} + \text{Net Income} - \text{Dividends}
\]
Assuming dividends are proportionally distributed and are roughly 50% of net income:
\[
\text{Dividends} \approx 0.689\, \text{billion}
\]
Therefore:
\[
\text{Ending Equity} = 7\, \text{billion} + 1.377\, \text{billion} - 0.689\, \text{billion} \approx 7.69\, \text{billion}
\]
- Liabilities:
Calculated as:
\[
\text{Total Assets} - \text{Total Equity} = 17.6\, \text{billion} - 7.69\, \text{billion} \approx 9.91\, \text{billion}
\]
Return on Equity (ROE) Using DuPont Analysis
The DuPont framework decomposes ROE into three components:
\[
\text{ROE} = \text{Profit Margin} \times \text{Total Asset Turnover} \times \text{Equity Multiplier}
\]
Where:
- Profit Margin = Net Income / Sales
- Total Asset Turnover = Sales / Total Assets
- Equity Multiplier = Total Assets / Total Equity
Calculations:
\[
\text{Profit Margin} = \frac{1.377\, \text{billion}}{14.3\, \text{billion}} \approx 9.63\%
\]
\[
\text{Total Asset Turnover} = \frac{14.3\, \text{billion}}{17.6\, \text{billion}} \approx 0.812
\]
\[
\text{Equity Multiplier} = \frac{17.6\, \text{billion}}{7.69\, \text{billion}} \approx 2.29
\]
Therefore, the projected ROE:
\[
\text{ROE} \approx 9.63\% \times 0.812 \times 2.29 \approx 17.9\%
\]
Economic Value Added (EVA)
EVA measures the true economic profit after deducting the cost of capital. The formula:
\[
\text{EVA} = \text{Net Operating Profit After Taxes (NOPAT)} - \text{Capital Charge}
\]
- NOPAT: Operating Income × (1 - Tax rate)
Assuming a tax rate of approximately 3.69%, as previously calculated:
\[
\text{NOPAT} = 1.65\, \text{billion} \times (1 - 0.0369) \approx 1.59\, \text{billion}
\]
- Capital Charge: Capital × Cost of Capital
Assuming Parker Hannifin's weighted average cost of capital (WACC) is 8%, and capital employed (total assets):
\[
\text{Capital Charge} = \text{Capital Employed} \times \text{WACC} = 17.6\, \text{billion} \times 8\% \approx 1.41\, \text{billion}
\]
Thus,
\[
\text{EVA} = 1.59\, \text{billion} - 1.41\, \text{billion} \approx 0.18\, \text{billion}
\]
This positive EVA indicates that Parker Hannifin is creating value over its cost of capital, signaling effective management performance.
Conclusion
The projected financial statements suggest that Parker Hannifin is on a growth trajectory, with a significant increase in sales and earnings. The expected ROE of approximately 17.9% reflects healthy profitability and efficient utilization of equity. The EVA further confirms value creation, which underpins effective management execution. These analyses provide investors and stakeholders with forward-looking insights into the company’s financial health, operational efficiency, and strategic effectiveness.
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