Question

10. The DuPont equation Corporate decision makers and analysts often use a technique called DuPont analysis to understand and assess the factors that drive a company's financial performance, as measured by its return on equity (ROE). Depending on the version used, the DuPont equation will deconstruct the firm's ROE, its best measure of financial performance, into two or three important factors, or drivers. DuPont analysis can be conducted using either the traditional DuPont equation or the extended DuPont equation. The traditional equation is constructed using two drivers, whereas the extended DuPont equation uses three variables to examine a firm's ROE performance. Complete the following sentences by entering the appropriate words or phrases. In the extended DuPont equation, a firm's ROE reflects (1) its use of debt financing, or leverage, as reflected by its (2) the efficiency with which it uses its assets, as measured by the , and (3) its ability to generate sales and manage its production costs and operating expenses, as summarized by its In contrast, sometimes it is useful to focus just on asset profitability and financial leverage. In this case, you would use the traditional version of the equation, in which the firm's efficiency and profitability metrics are multiplied and summarized in a single measure, the . In this analysis, a company's financial performance is expected to result from both management's financing decisions and its effectiveness and efficiency in generating profits using the firm's asset base. Most investors and analysts in the financial community observe a firm's ROE closely. The ROE can be calculated by dividing the firm's net income by the shareholders' equity, or it can be reduced into the key factors that drive the ROE. Investors and analysts like to focus on these drivers to develop a more holistic image of what is changing within a company. An analyst collected the following fiscal year 2018 data for firms operating in the transportation sector. Use the data to compute the net profit margin (NPM), total asset turnover (TAT), and equity multiplier (EM) values required for a DuPont analysis. (Note: Round your answers to two decimal places. The following dollar values are expressed in millions of U.S. dollars.)

Answer 1

In the extended DuPont equation, a firm's ROE reflects (1) its use of debt financing, or leverage, as reflected by its equity multiplier, (2) the efficiency with which it uses its assets, as measured by the total asset turnover, and (3) its ability to generate sales and manage its production costs and operating expenses, as summarized by its net profit margin.

In contrast, sometimes it is useful to focus just on asset profitability and financial leverage. In this case, you would use the traditional version of the equation, in which the firm's efficiency and profitability metrics are multiplied and summarized in a single measure, the return on total assets.

Kindly select appropriately from the drop-downs since the same have not been provided with the question.

Firm	Total Assets	Common Equity	Sales	Net Income	NPM	TAT	EM	ROE
A	28141	8700	10636	1563	14.70%	0.38	3.2346	17.97%
B	5641	2431	18158	180.2	0.99%	3.22	2.32	7.41%
C	28199	10669	9516	1496	15.72%	0.34	2.64	14.02%

Answer: Company B's ROE performance results from its terrible profitability and cost-containment performance, and despite its superior asset management productivity performance.