Q3-2DQ Explain how the Du Pont system o... [FREE SOLUTION]

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Foundations Of Financial Management

Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen

Business Studies

16th Edition 路 768 pages

ISBN: 9781259277160

Chapter 2: Q3-2DQ (page 74)

Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders鈥� equity

Short Answer

Expert verified

With the Du Pont system of analysis,the return on assets is calculated by multiplying the net profit margin with the total assets turnover. Andthe return on the stockholder鈥檚 equity is calculated by multiplying the return on the asset with the equity multiplier.

Step by step solution

Step: Definition

The Du Pont analysis breaks down the equation of Return on Equity (ROE) into three parts:

Profitability is measured by the profit margin(Net income/Revenue)
Asset efficiency is measured by asset turnover(Revenue/Average Total Assets)
Financial leverage is measured by the equity multiplier(Average Total Assets/Average Total Equity)

Step: By the Du Pont system, return on assets is broken down as

$R e t u r n o n A s s e t s (R O A) = P r o f i t m a r g i n 脳 A s s e t t u n o v e r = \frac{N e t i n c o m e}{S a l e s} 脳 \frac{S a l e s}{A v e r a g e T o t a l A s s e t s} = \frac{N e t i n c o m e}{A v e r a g e T o t a l A s s e t s}$

Step: By the Du Pont system, the return on stockholder’s equity is broken down as

$R e t u r n o n e q u i t y (R O E) = P r o f i t m a r g i n 脳 A s s e t t u n o v e r 脳 E q u i t y M u l t i p l i e r = \frac{N e t i n c o m e}{S a l e s} 脳 \frac{S a l e s}{A v e r a g e T o t a l A s s e t s} 脳 \frac{A v e r a g e T o t a l A s s e t s}{A v e r a g e T o t a l E q u i t y} = \frac{N e t i n c o m e}{A v e r a g e T o t a l E z u i t y}$

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Sales	\( 2790000
Cost of goods sold	1790000
Gross profits	\) 1000000
Selling and administrative expenses	302000
Operating profits	\( 698000
Interest Expense	54800
Income before tax	\) 643200
Taxes 30%	192960
Income after tax	$ 450240

	20X1	20X2
Sales	\(8,000,000	\)10,000,000
Cost of goods sold	6,000,000	9,000,000
Inventory	800,000	1,000,000

	Capable corporation	Muli-media inc
Net income	\(31,200	\)140,000
Sales	317,000	2,700,000
Total assets	402,000	965,000
Total debts	163,000	542,000
Stockholder鈥檚 equity	239,000	423,000

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Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders鈥� equity

Short Answer

Step by step solution

Step: Definition

Step: By the Du Pont system, return on assets is broken down as

Step: By the Du Pont system, the return on stockholder’s equity is broken down as

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