Construct the extended DuPont equation for both Lozano and the industry. The giv
ID: 2384501 • Letter: C
Question
Construct the extended DuPont equation for both Lozano and the industry.
The given Ratios:
Lozano (The Firm)
CA / CL: 2.01
Day’s sales Outstanding: 76.65
COGS/Inventory: 5.67
Sales/Fixed Assets: 5.56
Sales/ Total Assets: 1.75
Net Income/Sales: 1.51%
Net Income/Total Assets: 2.64
Net Income/Common Equity: 6.45
Total Debt/Total Assets: 25%
TL /TA: 59%
Industry Average
CA / CL: 2.0
Day’s sales Outstanding: 35.0
COGS/Inventory: 6.7
Sales/Fixed Assets: 12.1
Sales/ Total Assets: 3.0
Net Income/Sales: 1.2%
Net Income/Total Assets: 3.6%
Net Income/Common Equity: 9.0%
Total Debt/Total Assets: 30.0%
TL /TA: 60.0%
Questions:
For the Lozano (the firm), ROE is: %
For the industry, ROE is: %
Outline Lozano’s Strength and weaknesses as revealed by your analysis.
**PLEASE SHOW ANY and ALL FORMULA WORK AS NEEDED, THANK-YOU!**
Explanation / Answer
Du pont Equation :
Return on Equity = (Net Income/Sales) * (Sales/ Total Assets) * (Total Assets / Equity)
For Lozano (The Firm):
Total Assets / Equity = 1 / (1-(Total lIability / Total Assets)) = 1 / (1-59%) = 2.4390
Hence,
Return on Equity = 1.51% * 1.75 * 2.439 = 6.45%
For the industry:
Total Assets / Equity = 1 / (1-(Total lIability / Total Assets)) = 1 / (1-60%) = 2.5
Return on Equity = 1.2% * 3 * 2.5 = 9%
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