Question

Below, you can find the comparative Financial Statement of Megasales» Company (in thousands of €) for the years 20X2 and 20X1: Comparative Balance Sheet “Megasales Company" 20X2 20X1 20X2 20X1 Liabilities & Stockholders' Equity Stockholders' Equity: Common Stock Assets Fixed Assets: Property, Plant and Equipment Other Assets Total Fixed Assets 60,000 48,777 56,786 21,352 78,138 22.000 82,000 6.000 11,509 55,000 6,000 15.143 66,286 76,143 Current Assets: Cash and Cash Equivalents Accounts Receivables Inventory / 1,627 14,086 15,692 935 1,800 17,000 15,200 1,143 24.700 532 3,934 26,000 700 2,000 Prepaid Expenses 32,340 35,143 29,166 28,700 Total Current Assets Preferred Stock Retained Earnings Total Stockholders' Equity Long-Term Liabilities Long-Term Debt Deferred Tax Liabilities Other Long-Term Liabilities Total Long-Terin Liabilities Current Liabilities Short-Term Debt Accounts Payable Accrual Liabilities Advances Received Accrued Tax Payable Total Current Liabilities Total Liabilities Total Liabilities and Stockholders' Equity 3.950 5.810 1.478 2.173 1.614 4.100 5,200 1,250 380 1.370 15,025 44,191 110,477 12,300 41,000 117,143 Total Assets 110,477 117,143

Required
1. For the years 20X2 and 20X1, conduct the DuPont Analysis and calculate the
Return of Equity (ROE) for “Megasales Company”. (Please show the
analytical computations for all components of the DuPont Analysis for the two
respective years).
2. For the years 20X2 and 20X1, compute the Return of Equity (ROE) for
“Megasales Company”. Analyze and interpret your results for the two years
under examination.
3. Describe how each of the three components of the DuPont Analysis, affects
the change in the Return of Equity (ROE) from 20X1 to 20X2. How does the
level of debt affect the level of ROE? (Explain briefly. Max 300 words)
4. What are the possible limitations of the ROE analysis as far as profitability is
concerned? (Explain briefly. Max 300 words

Answer 1

yo company name:- 'megasales Dupont Analysis for the years 20x2 220x2 I Du-pont formula I It is Return on equity only but it has elements that serve as Il components that make return on equity I Formula = Net profity Asset x Turmoner equity multiplir m راز Net profit margin = Net Income Revenue Asset tumorer = sales Average total sets

Equely multipliss Average total assess - Aug shareholders requity A Du-port for the year 2002 Net profit margin = = Net income Net sales 12, 444 103,683 0:12 Asset turnoner = Net sales Ancrage total Assets = 103,683 7110,477 + 117,143) 2 103,683 113810 - 0.911

PAGE NC DATE 1 year 2002 Equity mullipler Eauity mullipher = Total Assets Total Equity = - = 110,477 66,286 1.667 | Du-pent Analysis = 0.12%0.911 * 1.667 = 0.182 Z Retum on leg - 0.182

Du-pont for year 20x1 Net propri margins - 5200 113,127 = 0.045 - Asset tumori = 113127 r/132, 372 +117143) 2 T2 - = 0.906 Equbiy multiples = 117143, =153 76, 143 Nu-pont Analysis =0.045 ×0.906 *1.53 = 0.062

2. Retum in equity Formula - Net profit after tox - Preference dinidend Total shareholder - equity For the year 2012 ROI = 12,444 - 40% I 66,286 100 18.71 .. for the year 20x1 . ROI = 5200 1 woo | 76,143 6.82% Return on Equity for 20x2 is greater as net propt is higher even though equity is less Increase in operating expenses in 20x 1 led to decrease in profits.

Decrease in admin expenses and operating expenses in year 2012 increased profit and hence increased return on equity There are various components in calculation of neturn on equity using Dupont o Net profit margins - It is simply after tax profit a company generates for each dollar of revenue. I Highes net profit margir is preferable because it is a safety cushion. ii) Asset turmoner - It measures how effectively a company converts its assets into sales. f asset tumener ratio is inversely related to net profit margin. The result is that the investor can compare companies using different models (low-profit high volume)

اه اه باید به رنسنا - بیمار مبل ژنرال نزن برگ درا دم -خرون مار لیا израар, 1 с. Сеторату и terrible sais and margins to take on excessine debt and artifically increase its return on equity. The equity multipler, is a measure of financial leverage that allong the investor to see what portion of the return on cauity is to result of debt. a. How does debt equity? affect Retum on By taking debt company increases its assits a cash comes in when the low debentures or any other ditt instrument is issus requity = Assets - Debt So, equity decreases as debt And since equitu is in denominas rases e denominator

PAGE 1 DATE of the ROE somula, RoE increases! - 4. Limitations of ROE analysis as far as beprotys concerned. her 20.smare miscalculations on managements part could lead to tremendous losses with no warnsra 6 Dupent extracts data from income statement which may not be arcuate 3 - It works best it companies of same size working insame industry.