The following data are from a company, 2014 financial statement: Sales $2,000,00

Question

The following data are from a company, 2014 financial statement: Sales $2,000,000 Net Income $200,000 Total Assets $1,000,000 Debt to TA Ratio 60% 1. Construct and solve the DuPont and Modified DuPont equations for the company. 2. What would be the impact on ROE if the debt to TA ratio were 80%? 3. What would be the impact on ROE if the debt to TA were 20%? The following data are from a company, 2014 financial statement: Sales $2,000,000 Net Income $200,000 Total Assets $1,000,000 Debt to TA Ratio 60% 1. Construct and solve the DuPont and Modified DuPont equations for the company. 2. What would be the impact on ROE if the debt to TA ratio were 80%? 3. What would be the impact on ROE if the debt to TA were 20%?

Explanation / Answer

Due Pont Equations of the company = Profit Margin*Total Assets Turnover * Financial Leverage

Proft Margin= Net Income /sales =200000/2000000=0.10

Total Asset turnover=Dupont equation the ROE= 0.10*2*2.5=0.50 or 50%

if the debt to TA ratio were 80%

the ROE= 0.10*2*5(80% debt 20% equity)=1 or 100%

if the debt to TA ratio were 20% (20% debt 80% equity)

ROE=0.10*2*1.25=0.25 or 25%

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