Question

Company's name	The Walt Disney Company (DIS)
Revenues or Sales (TTM)	69,762,000
Net Income (TTM)	6,542,000
Total assets (6/30/2020)	207,649,000
Total Common Stock (6/30/2020)	85,866,000
Using the information collected, determine your company's profit margin (PM).
Using the information collected, determine your company's total asset turnover (TA).
Using the information collect, determine your company's equity multiplier (EM).
Using the DuPont Equation, determine your company's return on equity (ROE).
Assume that the EM for your company doubles. Discuss the impact it would have on financial leverage and your company's return on equity.

Answer 1

Profit Margin

Profit margin can be defined as the percentage which helps to measure the earnings of the company in relation to its overall revenue during the period. The formula for calculating profit margin is given in the equation below:

Compute profit margin of the company by using the equation given below:

Hence, the profit margin of the company comes out to be 9.38%.

Total Asset Turnover

Total asset turnover can be defined as the ratio which describes the financial efficiency of the company to generate sales by use of its assets. The formula for calculating total asset turnover ratio is given in the equation below:

Compute total asset tuenover ratio of the company by using the equation given below:

Hence, the total asset turnover ratio of the company comes out to be 0.34 times.

Equity Multiplier

Equity multiplier can be defined as a ratio which helps to calculate the portion of assets financed in the company by the use of equity. The formula for calculating equity multiplier is given in the equation below:

Compute equity multiplier of the company by using the equation given below:

Hence, the equity multiplier of the company comes out to be 2.42.

Return on Equity (ROE)

Return on equity can be defined as the measure which helps to compute the financial performace of the company in order to know how well the company is using the money invested by the investors in the company. The formula for computing ROE by using du pont equation is given below:

Compute ROE of the company by using du pont analysis given in the equation below:

Hence, the ROE of the company comes out to be 7.72%.

Impact:

As discussed, equity multiplier is one of the financial leverage ratio which helps to compute the part of assets financed in the company by the use of equity. Now, suppose if the equity multiplier of the company gets double, it affects the financial leverage, which simply means high equity multiplier indicates usage of less equity and more debt funds in the company and is more risky too. However, sometimes it helps to reflect the effectiveness towards the strategy of the company in order to purchase assets at less cost.

Similarly, if the equity multiplier gets double, the ROE of the company also doubles as it possess direct relationship with return on equity. High equity multiplier is less favourable as it indicates usage of hig level of debt in its capital structure which results in lowering the overall cost of capital of the company.