Question

10. The DuPont equation Corporate decision makers and analysts often use a technique called DuPont analysis to understand and assess the factors that drive a company's financial performance, as measured by its return on equity (ROE). Depending on the version used, the DuPont equation will deconstruct the firm's ROE, its best measure of financial performance, into two or three important factors, or drivers. DuPont analysis can be conducted using either the traditional DuPont equation or the extended DuPont equation. The traditional equation is constructed using two drivers, whereas the extended DuPont equation uses three variables to examine a firm's ROE performance. Complete the following sentences by entering the appropriate words or phrases. In the extended DuPont equation, a firm's ROE reflects (1) its use of debt financing, or leverage, as reflected by its (2) the efficiency with which it uses its assets, as measured by the ..and (3) its ability to generate sales and manage its production costs and operating expenses, as summarized by its In contrast, sometimes it is useful to focus just on asset profitability and financial leverage. In this case, you would use the traditional version of the equation, in which the firm's efficiency and profitability metrics are multiplied and summarized in a single measure, the In this analysis, a company's financial performance is expected to result from both management's financing decisions and its effectiveness and efficiency in generating profits using the firm's asset base

Answer 1

Sol" Extended Dupont equation: ROE - NPM x Asset Turnover x Equity Multiplier where (NPM) Net Profit Margin = Net Income Sales Asset Turnover = Sales Assets Equity Multiplier - Assets Shareholders Equity NPM shows how much profit the company gets out of its revenues. Assets Turnover shows how effectively the company makes use of its assets. Equity Multiplier shows how much the company is leveraged. Answer to fill in the blanks: u Equity Multiklien (2) Total Assets Turnover (3) Net Profit Margin.

In traditional DuPont equation ROE - NPM X Equity Turnover Ratio NPM = Net Income Sales Equity Turnover Ratio = Sales Shareholderis Equity or simply ROE = Net Income Shareholders Equity Therefore, in traditional version, the firms efficiency and profitability metrics are multiplied and Summarised in a single measure the Equity Turnover Ratio Sales & Assets sales Assets ^ Shareholders Equity - Shareholder's Equity Equity Turnover Ratio

Firm А в i) Total Assets $28141 $8700 $10636 $5641 $2431 с $28199 $10669 in Common Equity vir Sales in Net Income $ 18158 $9516 $ 1563 $180.2 $1496 (VI NPM 14.7% 0.99% [15.72% vi TAT [ 0.38 0.38 3.22 3.22 0.34 0.34 (1) vii) EM 3.23 3.23 2.32 2.64 viis RoE - (VXO 18-04%. 7.407.) 14.17 xvii) Yollowing statement is true, Company B's ROE performance (7.4%) results from its terrible profitability (0.99%) despite its superior asset management (3.22; highest)