Question

3. Use the following financial information to answer the questions that follow: 20 points AT&T Verizon $16.1 Billion Net Income Return on Assets $16.4 Billion 3.23% 7.21% $182 Billion $132 Billion Revenue Total Debt Stock Price Dividends per share EPS $197 Billion $132 Billion $59.51 $39.50 $2.04 $2.46 $3.89 $2.23 Compare AT&T's and Verizon's retention ratio and dividend yield. Discuss what factors contributed to each firm's ROE using the Dupont analysis. (NPM, TAT, EM)

Answer 1

Answer:-

AT&T

Dividend yield = dividend per share / market price per share
= $ 2.04 / $ 39.50  
= 0.05165
= 5.165 %

Retention ratio = 1- Dividend payout ratio
Dividend payout ratio = Dividend / net income
= $ 2.04 / $ 16.4
= 0.1244 = 12.44 %
Retention ratio = 1 - 0.1244 = 0.8756 = 87.56 %

Verizon

Dividend yield = dividend per share / market price per share
= $ 2.46 / $ 59.51  
= 0.04134
= 4.134 %

Retention ratio = 1- Dividend payout ratio
Dividend payout ratio = Dividend / net income
= $ 2.46 / $ 16.1
= 0.1528 = 15.28 %
Retention ratio = 1 - 0.1528 = 0.8472 = 84.72 %

AT&T

Dupont Analysis

ROA = Net income / Sales x Sales / Assets = 3.23 % = $ 16.4 / $ 182 x Sales / Assets

Sales / Assets = .0323 x $ 182 / $ 16.4 = 0.3585
$ 182 / Assets = 0.3585
Assets = $ 182 / 0.3585 = $ 507.67
Assets = Equity + Debt
$ 507.67 = Equity + $ 197
Equity = $ 507.67 - $ 197 = $ 310.67

ROE = Net income / Sales x Sales / Assets x Assets / Equity = Net profit margin x Asset turnover x Equity multiplier

ROE = $ 16.4 / $ 182 x $ 182 / $ 507.67 x $ 507.67 / $ 310.67
ROE = 0.09 x 0.359 x 1.634 = 0.05279 = 5.279 %
The net profit margin was low at 9% , the asset turnover ratio is 0.359 whereas the equity multiplier was high at 1.634

Verizon

Dupont Analysis

ROA = Net income / Sales x Sales / Assets = 7.21 % = $ 16.1 / $ 132 x Sales / Assets
Sales / Assets = 0.0721 x $ 132 / $ 16.1 = 0.591

$ 132 / Assets = 0.591
Assets = $ 132 / 0.591 = $ 223.35

Assets = Equity + Debt
$ 223.35 = Equity + $ 132
Equity = $ 223.35 - $ 132 = $ 91.35

ROE = Net income / Sales x Sales / Assets x Assets / Equity = Net profit margin x Asset turnover x Equity multiplier

ROE = $ 16.1 / $ 132 x $ 132 / $ 223.35 x $ 223.35 / $ 91.35
ROE = 0.122 x 0.591 x 2.445 = 0.1763 = 17.63 %

The net profit margin was at 12.2 % , the asset turnover ratio is 0.591 and the equity multiplier stood at 2.445