corporate dedision makers and analysts often use a partioular technique, called
ID: 2617634 • Letter: C
Question
corporate dedision makers and analysts often use a partioular technique, called a DuPont analysis, to better understand the factors that drive a company's financial performance, s reflected by its retum on equity (ROE) By using the buPont equation, whidh disaggregates the ROE into three components, analysts can see why a company's ROE may have changed for the better or worse, and identify partioular company strengths and weaknesses. The DuPont Equation which helps to identify and analyze three important factors that drive a companys A Dupont analysis is conducted using the DuPont equation, RoE. Complete the follawing equations, which are needed to conduct a Dupent analysis ROE= Profit Margin x Total Assets Turnover xD XTotal Assets Total Assets Total Common Equity Most investors and analysts in the financial community pey partioular attention to a companys ROE. The ROE can be calculated simply by dividing a firm's net income by the fim's shareho ders equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to develop a clearer picture of what is happening within a company. An analyst gathered the following data and calculated the various terms of the DuPont equaton for three companies ROEProfit Margin x Total Assets Turnover x Equity Multiplier Company A company company C 12.0% 15.5%. 21.5% 57.3% 58.2% 58.0% 9.8 0.2 D.3 2.14 2.61 3.60 Referring to these data, which of the following concusions will be true about the companies ROES? O The main driver of company A's inferior ROE/ compared to that of company CS ROE. is ts higer total asset tumover rabio O The main driver of company c's supenor Roecompared to that of company As and company B's ROE.is its greaber use of cebt financing O The main driver of company A's inferior Roe, as compared to that of company es and company CS ROE, Is its use of higher debt financing.Explanation / Answer
The ROE in Dupont analysis is based on 3 factors Net Profit Margin, Asset Turnover ratio and Equity Multiplier or leverage ratio.
Referring to the data the conclusions which is true about the companies ROEs is The main driver of company C's superior ROE as compared to that of company A's and company B's ROE is its greater use of debt financing.
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