Hi, i am working on Equity and had question regarding example 5(iii) for reading 29. It is on page 122 in ebook.
In the solution, i am not sure how profit margin for each section is applied. Per question, asia pecific growth rate should increase by 50bps each year. So given that it was 10.5% in 2011, i would think it will be 11% in 2012. But text book used 14.85 for asia region. Please let me know if anyone understand how it happened and how it is solved fir western europe
There is a difference between revenue growth and operating margin growth. I think you may be confusing the two.
Asia’s USG (underlying sales growth), ie, revenue growth, was 10.5% from 2010 to 2011. The question asks you to assume Unilever can continue this revenue growth for the next five years. So, it wouldn’t be 11% on 2012, it would be 10.5%.
The 50bps increase is in operating profit margin; that is what increases each year. Operating profit margin for Asia was 12.72% in 2011. If we increase that by 50bps per year, then in 2012 it will be 13.22%, which is reflected in Exhibit 10.
So, for Western Europe. 2011 Revenue = 12,269. Since USG was 0.7%, therefore 2012E Revenue = 12,269*(1.007) = 12,355. 2011 Operating Margin decreases by 50bps from 17.19% to 16.69%. Hence, operating profit was 12,355 * 0.1669 = 2,062. We now have the information we need for Western Europe. Repeat for Asia and Americas. To find the operating profit margin then, you sum the 2012E Operating Profit from each region and divide by 2012E Total Revenue, and you will get 14.87% total underlying profit margin for 2012E.
To get 2016E, which is what the question wants, simply go 12,269*(1.007)^5 to get Revenue, and 0.1719 - 5(0.005) = 0.1469 to get operating margin. Multiply to get operating profit, etc.
Hope that helps.
Thank you so much for explaining it. I understand it now.