Question

In: Finance

4. The DuPont System allows us to relate the return on total assets and the return...

4. The DuPont System allows us to relate the return on total assets and the return on common equity to various measures of firm characteristics. Consider a firm with a ROA of 0.04.
a. If you were analyzing a firm that had sales of $12500 and total assets of $10000, how much in earnings were available for common shareholders?

b.If the firm had common stockholders' equity of $3300, what would be the firm's ROE?

c. If we compare this firm to another similar firm in the industry we find that the comparison firm has an ROA and ROE of 0.05 and 0.191663, respectively. Given this information, calculate the comparison firm's ratio of total assets to common stock equity. How does this ratio differ from our firm?

d.Interpret the performance differences between these firms.

Expert Solution

Answer (a):

Total assets = $10000

ROA = 0.04

ROA = Net Income /Total assets

=>Net Income = ROA * Total assets = 0.04 * 10000 = $400

Hence:

Earnings were available for common shareholders = $400

Answer (b):

ROE = Earnings were available for common shareholders / Equity = 400 / 3300 = 12.12%

ROE = 12.12%

Answer (c):

Comparison firm has:

ROA = 0.05 and

ROE = 0.191663

ROA = Net Income /Assets

=> Net Income = ROA * Assets

ROE = Net Income /Equity = ROA * Assets / Equity

=> Assets / Equity = ROE / ROA = 0.191663 / 0.05 = 3.83

Comparison firm's ratio of total assets to common stock equity = 3.83

Our firm's ratio of total assets to common stock equity = 0.1212 / 0.04 = 3.03

As such comparison firm has higher ratio of total assets to common stock equity as compared to our firm

Answer (d):

In terms of both ROA and ROE comparison firm is performing better as compared to our firm.

Further comparison firm has higher ratio of total assets to common stock equity as compared to our firm.

As comparison firm has better ROA, it is managing its assets more efficiently as compared to our firm.

Further comparison firm's higher ratio of total assets to common stock equity indicates that its financial leverage is higher as compared to our firm.

jeff jeffy answered 2 weeks ago

What is the return on average total assets?

The following figures are taken from Ethaniel Company's financial statements for the calendar years 200B and 200A: 200B 200A Total Assets $900,000 $750,000 Long-term debt (12% interest rate) 125,000 8% Preferred stocks, $100 par value 225,000 225,000 Total Stockholders' equity 600,000 550,000 Net Income (after tax of 30%) 70,000 550,000 What is the return on average total assets?

Explain the importance of each component of the DuPont Identity (return on equity, profit margin, total...

Explain the importance of each component of the DuPont Identity (return on equity, profit margin, total asset turnover, equity multiplier).

Sales/Total assets = 4.5× Return on assets (ROA) = 10.0% Return on equity (ROE) = 50.0%...

Sales/Total assets = 4.5× Return on assets (ROA) = 10.0% Return on equity (ROE) = 50.0% Book Value of Stockholders’ equity = $30 Price/Earnings ratio = 6.0x Common shares outstanding = 50 Market/Book ratio = 3.0x A. Calculate the price of a share of the company’s common stock. B. Calculate debt-to-assets ratio assuming the firm uses only debt and common equity. C. What were sales last year? D. What is the company’s market value?

A firm’s Total Assets equals $10,000,000, and Total Equity equals $3,000,000. If its Return on Assets...

A firm’s Total Assets equals $10,000,000, and Total Equity equals $3,000,000. If its Return on Assets equals 10%, then what is its Earnings After Taxes? a. $700,000 b. need to know what its Revenues are c. $300,000 d. $1,000,000

1. The return on assets ratio tells us the profit generated by each dollar in assets....

1. The return on assets ratio tells us the profit generated by each dollar in assets. You will want to compare this ratio to Choice Hotels' historical performance and to Marriott International to understand if it is an acceptable ratio. Is the return on assets ratio acceptable? Why or why not? 2. Which of the above ratios would you use to determine which company, Choice Hotels or Marriott International, is more attractive for an acquisition? Why? 3. Based on the...

Total assets = $500,000, total asset turnover = 1.40, total debt ratio = 0.30, return on...

Total assets = $500,000, total asset turnover = 1.40, total debt ratio = 0.30, return on assets = 8.60%. What is the return on equity? A. Below 6.55% B. Between 6.55% and 8.05% C. Between 8.05% and 9.55% D. Between 9.55% and 11.05% E. Between 11.05% and 12.55% F. Between 12.55% and 14.05% G. Between 14.05% and 15.55% H. Above 15.55%

If the company's return on total assets = -0.4, what does it indicate?

Question 1 Comparing the operating profit against total assets is often referred to return on assets...

Question 1 Comparing the operating profit against total assets is often referred to return on assets (ROA). Which of the following categories does ROA help evaluate? Select one: a. liquidity b. leverage c. revenue d. profitability Question 3 Which of the following items would not be found on a balance sheet? Select one: a. Retained Earnings b. Property, plant and equipment c. Contributed Capital d. Cash paid to suppliers Question 4 Not yet answered Which of the following groups would...

Define and differentiate between return on total assets (ROA), return on equity (ROE), and earnings per...

Define and differentiate between return on total assets (ROA), return on equity (ROE), and earnings per share (EPS). Which measure is probably of greatest interest to owners? Why?

Assume the following relationships for the Caulder Corp.: Sales/Total assets 2.3× Return on assets (ROA) 5.0%...

Assume the following relationships for the Caulder Corp.: Sales/Total assets 2.3× Return on assets (ROA) 5.0% Return on equity (ROE) 9.0% Calculate Caulder's profit margin and debt-to-capital ratio assuming the firm uses only debt and common equity, so total assets equal total invested capital. Do not round intermediate calculations. Round your answers to two decimal places. Profit Margin: %? Debt-to-capital ratio: %?