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QUESTION 1

Historical Income Statement for MKH, Inc.

Item	2019 $ millions	2020 $ millions
Revenue Operating expenses Depreciation	810 (600) (80)	880 (640) (90)
Operating Profit Interest income Interest expense Loss on equity investment	130 5 (10) 0	150 5 (10) (25)
Earnings before taxes Taxes	125 (50)	120 (48)
Net Income	75	72

Historical Balance Sheet for MKH, Inc.

Item	2019 $ millions	2020 $ millions
Cash Marketable Securities Inventory	5 155 250	10 107 300
Current Assets Property, plant, and equipment Equity investments at cost	410 400 100	417 500 75
Total Assets	910	992
Accounts payable Current portion of long-term debt	200 20	210 20
Current liabilities Long-term debt Equity Retained earnings	220 200 100 390	230 200 100 462
Total liabilities and shareholder equity	910	992

Required:

1. Assuming the marginal tax rate equals 40 percent, compute MKHs EBITDA, NOPLAT, Invested Capital, and ROIC (for simplicity, use year-end invested capital). Is ROIC increasing or decreasing?

(12 marks)

2. Decompose MKMs ROIC and explain how each component of the decomposition leads to an integrated perspective of performance. Address whether operating margins or capital turnover is driving the drop in ROIC.

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