Question

the DuPont formula relates return on equit

The DuPont formula relates return on equity (= Net income, - Stockholders equity) to the company's net profit margin (= Net income Sales), asset turnover (= Sales + Total assets), and equity multiplier (= Total assets + Stockholders equity). This Company is in an industry where the average net profit margin is 6.19%, the debt-to-asset ratio (= Debt + Total assets) is 27.9%, and return on equity is 20.22%. Find below the Company's financial statements for year 2525. Balance Sheet, 12/31/2525 Income, 1/1 - 12/31/2525 $1,750 Current assets $1,150 Debt Sales $12,615 $2.600 PP&E $3.200 Stockholders' equity total costs $11.850 $4,350 Total assets $4,350 net income $765 For the company relative to the industry, select the one statement most consistent with the DuPont analysis. a. the company's asset turnover indicates sales are unusually large relative to its assets b. the company's profit margin indicates its revenues are unusually large relative to its costs c. the company's equity multiplier indicates the firm has an unusually small debt burden d. the company's asset turnover indicates sales are unusually small relative to its assets e. the company's equity multiplier indicates the firm has an unusually large debt burden

Answer 1

Return on equity = net income / stockholders equity

= $765/3200 = 23.91%

Net profit margin = net income / sales

= $765/$12615 = 6.06%

Asset turnover = sales / total assets

=$12615/$4350

= 2.9 times

Equity multiplier

= Total assets / stockholders equity

= $4350/$3200

= 1.36

Analysis of above ratios

1. Net profit margin of company is slightly less than industry average. However it's not unusually high as compared to costs.

2. Return on equity of company is higher than industry average.

3. Sales are unusually high as compared to assets. Which is almost three times of assets value.

4. Equity multiplier indicates that most of the assets are financed by equity or less financed by debt. But it's usual.

So answer is option A.

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