Construct the extended Du Pont equation for both Lozano and the industry. Lozano
ID: 2651744 • Letter: C
Question
Construct the extended Du Pont equation for both Lozano and the industry.
Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands
of Dollars)
Cash $ 225,000 Accounts payable $ 601,866
Receivables 1,575,000 Notes payable 326,634
Inventories 1,125,000 Other current liabilities 525,000
Total current assets $2,950,000 Total current liabilities $1,453,500
Net fixed assets 1,350,000 Long-term debt 1,068,750
__________ Common equity 1,752,750
Total assets $4,275,000 Total liabilities and equity $4,275,000
Lozano Chip Company: Income Statement for Year Ended December 31, 2013
(Thousands of Dollars)
Sales $ 7,500,000
Cost of goods sold 6,375,000
Selling, general, and administrative expenses 825,000
Earnings before interest and taxes (EBIT) $ 300,000
Interest expense 111,631
Earnings before taxes (EBT) $ 188,369
Federal and state income taxes (40%) 75,348
Net income $ 113,022
Ratio Lozano Industry Average
Current assets/Current liabilities __________ 2.0
Days sales outstanding (365-day year) __________ 35.0 days
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%
Total liabilities/Total assets __________ 60.0%
Explanation / Answer
Current assets/Current liabilities= 2950000/1453500= 2.03
Days sales outstanding (365-day year)= Accounts Receivable x 365 /Annual sales= 1575000x 365/7500000= 76.65
COGS/Inventory = 6375000/1,125,000 = 5.67
Sales/ fixed assets= 7500000/1350000=5.56
sales/total assets= 7500000/4275000= 1.75
Net income/sales= 113022/7500000= 1.5%
Net income/ total assets= 113022/4275000= 2.64%
Net income / common equity= 113022/1752750= 6.45%
Total debt/ total assets=1068750/4275000= 25%
Total liabilities/ total assets= 2522250/4275000= 59%
Dupont is explained by 2 ways:
i) Return on Equity (ROE) = Net Profit / Average Equity= 6.45%, 9%
Once again, this equation can be expanded into the following form:
ROE = (Net Profit Margin) x (Asset Turnover) x (Asset / Equity Ratio)
=1.5%x 1.75x 2.44= 6.45%, 1.2x 3x 2.5= 9%
II) The model begins by looking at the company's return on assets (ROA) or return on investment (ROI):
Return on Assets (ROA) = Profit Margin x Total Asset Turnover
= 1.5%x 1.75=2.625, 1.2x3 = 3.6
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