Question

Please help me solve the following questions, a detailed presentation of steps would be greatly appreciated, thank you!

Consider the following two companies and the operating decisions they have made over a five - year period COMPANY B In Thousand Dollars Net Income Sales Total Assets 2001 2002 2003 2004 2005 119.3 120 123 125 941.511221360 1620 1890 1001.61001.6 1001.6 1001.6 1001.6 656 23 122 656 656 656 656 Book Value of Equity Family living withdrawals 23 23 23 23 COMPANY In Thousand Dollars 2001 2002 2003 2004 2005 189 941.51000 1080 1240 1340 1001.6 1080 1180 1355 1475 656 40 119.3 126 150 173 Net Income Sales Total Assets 656 656 656 656 Book Value of Equity Family living withdrawals ratio 23 25 30 35 1.Perform a DuPont analysis and compare the results. How do these companies operating and financial decisions differ from each other? 2.Calculate the companies' sustainable growth rates and the corresponding sustainable growth challenge for each year. What operating and financial strategies can you recommend to attain balanced growth, whenever such goal is not attained?

Answer 1

1) Dupont Analysis = Net profit Margin × Asset Turnover × Financial Leverage

Dupont Analysis = Net Income/ Sales × Sales/ Total Assets × Total Assets/ Total Equity

I have attached a pic to explain the first question.

2) Growth Rate Calculation = (sales in 2002 - Sales in 2001)/Sales in 2001

This is the basic formulae for the growth rate.

Sales Growth Rate for Company B and C attached in Pic.

Company B is only investing in it's Sales Force and Marketing and not focussing on the Fixed Capital Formation, thereby not generating higher Operational efficiency to match the income with it's higher sales.

Company C should also invest in it's sales Force and Marketing, to match the Sales with higher Operational Efficiency.