Question

9

If we know that a firm has a net profit margin of 4 5%, total asset turnover of 0.78, and a fira cial leverage multiplier of 1 46, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earmings available for common stockholders divided by common stock equity? The firm's ROE is 11% (Round to two decimal places ) What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earmings available for common stockholders divided by common stock equity? (Select from the drop-down menus.) Observe the modified DuPont formula (see ) and notice that each component can be compared with industry standards to assess the firm's performance. Therefore, the advantage of using the Dupont system is that ROE is broken into three distinct components Starting at the right we see how increased assets over the owners' original equity. Next, moving to the left, we see how efficiently the firm used its has Y to generate sales. Finally, the shows the measure of profitability on sales net profit margin financial leverage ROA assets

Answer 1

Answer 1:

Workings:

Return on Equity = Profit Margin * Total Asset Turnover * Financial Leverage multiplier

= Net Income / Revenues * Revenues / Total Assets * Total Assets / Shareholders’ Equity

= 4.5% * 0.78 * 1.46

= 5.12%

Answer 2:

Observe the modified DuPont formula and notice that each component can be compared with industry standards to assess the firm's performance. Therefore, the advantage of using the Dupont system is the ROE is broken into three distinct components. Starting at the right we see how financial leverage has increased assets over the owners' original equity. Next, moving to left we see how efficiently the firm used its assets to generate sales. Finally the profit margin shows the measure of net profit margin on sales.