Question

Problem 2 - Use of Ratios to Make Other Calculations You have a company that currently has a market capitalization of $4.6 billion It has a market to book ratio of 3 and a book debt to equity ratio of 6. If cash is $1.1 billion, what is the company's enterprise value?

Solution:

Discussion of the Dupont Formula

The Dupont Formula is a way of disaggregating the components of ROE

ROE = Net Margin X Asset Turnover X Equity Multiplier

We know by definition, ROE = Net Income / Book Equity

Dupont shows us:

ROE =	Net Income /		Times		Sales/		Times		Assets/
	Sales				Assets				Equity

We also know by definition, ROA = Net Income / Assets

Dupont shows us:

ROA =	Net Income/		Times		Sales/
	Sales				Assets

Answer 1

Answer 1
i	Market capitalization		4.6	Billion
ii	Market to book ratio		3
iii	Debt to equity ratio		6
iv	Cash		1.1	Billion
v=i/ii	book value of equity =		1.53	Billion
vi=v*iii	value of debt =		9.20	Billion
viii=i+vi-iv	enterprise value =		12.70	Billion
Answer 2
DuPont Formula : DuPont break the formula for ROE and ROA as below-
Return on equity =		Net income/Total equity
	=	(Net income/total sales)*(Total sales/Total asset)*(total asset/Total equity)
	=	Net margin*Asset turn over * equity multiplier
	=	Return on Asset * equity multiplier
Return on Asset =		Net income/Asset
	=	(Net income/total sales)*(total sales/total asset)
	=	Net margin*Asset turnover
	=	ROE/Equity multiplier