Corporate Finance

Financial Statements and Firm Value 
 123

As can be seen from the data, the rise and subsequent drop in ROE is due to decreasing tax rate, variability

of asset turnover ratio and profit margin and an increase in leverage.

Exhibit 5.4 Financial data for Vishy Corp.
1997 1996 1995 1994 1993 1992
Net income/ 4.53 5.05 5.18 5.0 3.76 3.29
sales percent
Pretax 7.46 8.73 8.76 8.4 6.35 6.0
profit/sales percent
Asset turnover 1.43 1.39 1.38 1.37 1.41 1.43
ratio (X)
Total assets/ 2.53 2.47 2.40 2.46 2.43 2.43
equity
Dividend payout 47.9 46.5 47.9 52.9 71.6 84.5
ratio percent
Tax rate percent 38.2 41.3 40.6 40.0 39.7 45.7

PREDICTING DISTRESS

Lenders lend money in exchange for interest and principal payments over a specified period of time. Credit

risk refers to the chance that the expectation will not be met. One approach to estimating default risk is

to compute a composite risk measure based on a firm’s financial ratios advocated by Altman (1968). His

Z score model combines select financial ratios to come up with a score as follows:

DuPont Analysis of Hindustan Lever in 1999

Z= 0.012 × Net working capital/Total assets

+ 0.014 × Retained earnings/Total assets

+ 0.033 × EBIT/Total assets

+ 0.006 × Market value of equity/Book value of liabilities

+ 0.999 × Sales/Total assets