Chapter 14, Problem 7CP

The DuPont formula defines the net return on shareholders’ equity as a function of the following components: $\left(\text{LO 14}-\text{3}\right)$

• Operating margin.
• Asset turnover.
• Interest burden.
• Financial leverage.
• Income tax rate.

$\text{TABLE 14}.\text{18}$ SmileWhite Corporation financial statements: Years data ($000) except per share data)
Income statement	December 2017	December 2018	December 2019
Revenue	$\text{\$104,000}$	$\text{\$110,400}$	$\text{\$119,200}$
Cost of goods Sold	$\text{72,800}$	$\text{75,100}$	$\text{79,300}$
Selling, general, and admin expense	$\text{20,300}$	$\text{22,800}$	$\text{23,900}$
Depreciation and amortization	$\text{4,200}$	$\text{5,600}$	$\text{8,300}$
Operating income (EBIT)	$\text{\$6}\text{.700}$	$\text{\$6}\text{.900}$	$\text{\$7}\text{.700}$
Interest expense	$\text{600}$	$\text{350}$	$\text{350}$
income before taxes	$\text{\$6,100}$	$\text{\$6,550}$	$\text{\$7,350}$
Income taxes	$\text{2,100}$	$\text{2,200}$	$\text{2,500}$
Income after taxes	$\text{\$4,000}$	$\text{\$4,350}$	$\text{\$4,850}$
Diluted EPS	$\text{\$2}\text{.16}$	$\text{\$2}\text{.35}$	$\text{\$2}\text{.62}$
Average shares outstanding $\left(000\right)$	$\text{1}\text{.850}$	$\text{1}\text{.850}$	$\text{1}\text{.850}$

Financial statistics	December 2017	December 2018	December 2019	3-Year Average
COGS as % of sales	$70.00\%$	$68.00\%$	$66.53\%$	$68.10\%$
General & admin as % sales	$19.52$	$20.64$	$20.05$	$20.08$
Operating margin (%)	$6.44$	$6.25$	$6.46$
Pretax income/EBIT(%)	$91.04$	$94.93$	$95.45$
Tax rate (%)	$34.43$	$33.59$	$34.01$
Balance sheet	December 2017	December 2018	December 2019
Cash and cash equivalents	$\$7,900$	$\$3,300$	$\$1,700$
Accounts receivable	$7,500$	$8,000$	$9,000$
Inventories	$6,300$	$6,300$	$5,900$
Net property, plant, and equipment	$12,000$	$14,500$	$17,000$
Total assets	$\$33,700$	$\$32,100$	$\$33,600$
Current liabilities	$\$6,200$	$\$7,800$	$\$6,600$
Long-term debt	$9,000$	$4,300$	$4,300$
Total liabilities	$\$15,200$	$\$12,100$	$\$10,900$
Stockholders’ equity	$18,500$	$20,000$	$22,700$
Total liabilities and equity	$\$33,700$	$\$33,700$	$\$33,600$
Market price per share	$\$23.00$	$\$26.00$	$\$30.00$
Book value per share	$\$10.00$	$\$10.81$	$\$12.27$
Annual dividend per share	$\$1.42$	$\$1.53$	$\$1.72$

Using only the data in Table $\text{14}.\text{2}0$ :
a. Calculate each of the five components listed above for $\text{2}0\text{16}$ and $\text{2}0\text{19}$ , and calculate the retune on equity (ROE) for $\text{2}0\text{16}$ and $\text{2}0\text{19}$ , using all of the five components.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from $\text{2}0\text{16}$ to $\text{2}0\text{19}$ .

$\text{TABLE 14}.\text{19}$ Mastertoy Inc.: Actual $\text{2}0\text{18}$ and estimated $\text{2}0\text{19}$ financial statements for fiscal year ending December 31 ($ million except per-share data)
Income statement	$\text{2}0\text{18}$	$\text{2}0\text{19}$
Revenue	$\$4,750$	$\$5,140$
Cost of goods sold	$2,400$	$2,540$
Selling general, and administrative	$1,400$	$1,550$
Depreciation	$180$	$210$
Goodwill amortization	$10$	$10$
Operating income	$\$760$	$\$830$
Interest expense	$20$	$25$
Income before taxes	$\$740$	$\$805$
Income taxes	$265$	$295$
Net income	$\$475$	$\$510$
Earnings per share	$\$1.79$	$\$1.96$
Average shares outstanding (millions)	$265$	$260$
Balance sheet
Cash	$\$400$	$\$400$
Accounts receivable	$680$	$700$
Inventories	$570$	$600$
Net Property, plant, and equipment	$800$	$870$
Intangibles	$500$	$530$
Total assets	$\$2,950$	$\$3,100$
Current liabilities	$\$550$	$\$600$
Long-term debt	$300$	$300$
Total liabilities	$\$850$	$\$900$
Stockholders, equity	$2,100$	$2,200$
Total liabilities and equity	$\$2,950$	$\$3,100$
Book value per share	$\$7.92$	$\$8.46$
Annual dividend per share	$0.55$	$0.60$

$\text{TABLE 14}.\text{2}0$ Income statements and balance sheets
Income statement data	$2016$	$2019$
Revenues	$\$542$	$\$979$
Operating income	$\$38$	$\$76$
Depreciation and amortization	$3$	$9$
Interest expense	$3$	$0$
Pretax taxes	$\$32$	$\$67$
Income taxes	$13$	$37$
Net income after tax	$\$19$	$\$30$
Balance sheet data
Fixed assets	$\$41$	$\$70$
Total assets	$245$	$291$
Working capital	$123$	$157$
Total debt	$16$	$0$
Total shareholders’ equity	$159$	$220$