Chapter 19, Problem 13CP

Summary Introduction

(A)

Adequate information:

Given is the Income Statement and Balance Sheet for 2016 & 2019 in Table 14.20

To Compute:

Five Components as per DuPont formula for determining Return on Equity i.e.

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

Introduction:

There are broadly Five components for DuPont calculation which include Operating efficiency, Assets use efficiency, Financial Leverage, Interest burden, Income Tax Rate.

Operating efficiency is measured by profit margin, Assets use efficiency is measured by total asset turnover, financial leverage by the equity multiplier & Interest burden by pretax profit to earnings before interest & taxes and Income tax impact is derived by Profit after tax to profit before tax.

Summary Introduction

(B)

To Compute:

Discuss impact of the changes in asset turnover and financial leverage on the change of ROE from 2016 to 2019

Introduction:

In simple terms, Return on Equity is the determination of profitability of a company in relation to stockholder's equity. It is the net income earned as a percentage of equity of the shareholders.