Chapter 14, Problem 6CP

Summary Introduction

(a)

To Determine:

To determine the all components of Du Pont Formula.

Introduction:

Du Pont formula is used for analyzing fundamental performance of company or firm which decomposes the different drivers of returns on equity. There is a determination of net margin, asset turnover ratio and financial leverage.

Summary Introduction

(b)

To Determine:

To determine ROE for 2009 using the components of Du Pont Formula.

Introduction:

Du Pont formula is used for analyzing fundamental performance of company or firm which decomposes the different drivers of returns on equity. There is a determination of net margin, asset turnover ratio and financial leverage.

We have the formula for the return on common shareholder's equity ratio as below:

  $\text{ROE =}\frac{\text{Net Income-preferred dividends}}{Average\text{ common equity}}$

Summary Introduction

(c)

To Determine:

To determine the sustainable growth rate for 2009 by use of ROE and Plowback ratio.

Introduction:

Du Pont formula is used for analyzing fundamental performance of company or firm which decomposes the different drivers of returns on equity. There is a determination of net margin, asset turnover ratio and financial leverage.

For any company or organization, sustainable growth rate plays an important function to deal with being over-leveraged and avoid financial stress.

It involves in maximizing sales and revenue growth without raising any financial leverage.