Chapter 2, Problem 42P

a)

Summary Introduction

To determine: W Company’s ROE (return on equity) using direct method and with the help of DuPont identity.

Introduction:

Return on equity (ROE):

ROE is the amount of net income which is earned from the percentage of shareholders equity. It measures the profitability of a company through the value of shareholder equity.

Return on equity (ROE) using DuPont identity.

ROE can be determined by using the method of DuPont identity with the help of three main elements as follows:

• Profit margin
• Asset turnover ratio
• Equity multiplier

b)

Summary Introduction

To compare: The two firms (W Company and C Company) return on equity using DuPont identity.