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Tying the Ratios Together The DuPont equation shows the relationships among asset management, debt managem ent, and i profitability improving the firms performance. Its equation is: ratios. Management can use the DuPont equation to analyze ways of ROE Profit margin x Totał assets turnover x Equity multiplier Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. Qualitative factors also need to be considered Hide Feedbachk Correct Quantitative Problem: Rosnan Industries 2014 and 2013 balance sheets and income statements are shown below. Balance Sheets: 2014 2013 $90 275 375 $740 2,000 $2,740 $75 300 350 $725 1,490 $2,215 Cash and equivalents Accounts receivable Inventories Total current assets Net plant and equipment Total assets $150 75 140 $365 450 1,225 700 $85 50 165 $300 290 1,225 400 Accounts payable Accruals Notes payable Total current liabilities Long-term debt Common stock Retained earningsTotal liabilities and equity $2,740 $2,215 Income Statements: 2014 2013 Sales Operating costs excluding depreciation EBITDA Depreciation and amortization EBIT Interest EBT Taxes (40%) Net income $2,000 1,250 $750 100 $650 62 $588 235 $353 $1,500 1,000 $500 75 $425 45 $380 152 $228 Dividends paid Addition to retained earnings $53 $300 $48 $180 Shares outstanding Price WACC 100 $25.00 10.00% 100 $22.50 What is the firms 2014 current ratio? 2.03The 2014 current ratio indicates that Rosnan has sufficientcurrent assets to meet its current obligations as they come due. What is the firms 2014 total assets turnover ratio? 0.72 3 Hide Feedback Partially Correct Check My Work Feedback Review the total assets turnover ratio definition and equation. Realize that information will come from both the firms balance sheet and income statement. Make sure that you use 2014 data and not 2013 data. Given the 2014 current and total assets turnover ratios calculated above, if Rosnans 2014 quick ratio is 1.0 then an analyst might conclude that Rosnans fixed assets are managed inefficiently What is the firms 2014 debt-to-capital ratio? 鬓,If the industry average debt to capital ratio is 30% then Rosnans creditors have a bigger cushion than indicated by the industry average. What is the firms 2014 profit margin? 17.65 )% Hide Feedback Correct Check My Work Feedback Review the profit margin definition and equation. Realize that information will come from the firms income statement. Make sure that you use 2014 data and not 2013 data. Make sure that you include the correct type of income in the numerator. If the industry average profit margin is 12%, then Rosnans lower than average debt-to-capital ratio might be one reason for its high profit margin. True What is the firms 2014 price/earnings ratio? Round your answer to two decimal places. 7.08Using the DuPont equation, what is the firms 2014 ROE? Round your answer to two decimal places. Hide Feedback Incorrect Wo Review the DuPont equation Realize that youve calculated two of the three ratios used in the DuPont equation. Make sure that you use 2014 data and not 2013 data. Realize that you must use the irms balance sheet to get the information needed to calculate the firms equity multiplier Review how to calculate the firms equity multiplier Realize that you can check your answer by calculating ROE from the definitional equation.

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1) Total assets Sales Asset turnover 2740 2000 0.73 Notes payable Long term debt Total debt 2) 140 450 590 Capital 2375 Debt to capital 25% 3) Profit margin Total Asset turnover Equity multiplier 17.65% 0.73 1.42 ROE 18.34%

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