Assignment

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1) Decompose Alcoa’s ROE by quarter for 2006 and 2007. In what direction do you see the company’s performance moving? What other information would you like to see (be specific)? Answer: ROE is the return on equity which is determined using the formula net income divided by the total shareholders’ equity. This calculation is essential in order to understand whether there is any improvement or decrease in the return on investment for the common shareholders. In this case, from the below calculation it is clear that there is only a slight improvement in the ROE for 2007 when compared to 2006 ROE Calculation: (in $millions) 2006 2007 Consolidated net income I $2,248 $2,564 Total shareholders’ equity II $14,631 $16,061 ROE III=I/II 15.36% 15.96% Decomposing ROE: ROE = Net profit margin*Asset Turnover ratio * Financial leverage. Net profit margin = Net profit/Sales Asset turnover ratio = Sales/Total assets Financial leverage = Total asset/Total shareholders’ equity (in $millions) 2006 2007 % change Sales $30,379 $30,748 1.21% Net profit $2,248 $2,564 14.06% Net profit margin 7.40% 8.34% 0.94% Total assets $37,183 $38,803 4.36% Asset turnover ratio 0.8170132 0.792413 -2.46% Shareholders’ equity $14,631 $16,016 9.47% Financial leverage 2.5413847 2.4227647 -11.86% ROE 15.36% 16.01% 0.64% From the above decomposition of ROE it is clear that there is only slight improvement in the sales but the improvement in net income is more significant which indicates about the improvement in the profitability of the company. Overall net profit margin has increased by 0.94% which is a positive indication about the financial performance of the company. There is increase in the t... ... middle of paper ... ...milarly, new entrants are entering with the green technology in to the market which is making the new players more competent. Economic slowdown is also having direct impact on the business as aerospace and government contracts are mainly influenced by these factors. There are many competitors growing in the market that are not using the same quality like Alcoa and resulting in cheap imports which creates more stiff competition. Higher investment in the technology and operating efficiency is adding more pressure to the company along with the energy cost. Similarly, unfavorable currency movement is creating more trouble to the company. Alcoa is present in more countries which are creating more foreign exchange problems. They have versatile customer base, change in specification and business strategy of those companies is creating more difficulties for the business.

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