Question

For the firms in the popup​ window, find the return on equity using the three components of the DuPont​ identity: operating​ efficiency, as measured by the profit margin​ (net income/sales); asset management​ efficiency, as measured by asset turnover​ (sales/total assets); and financial​ leverage, as measured by the equity multiplier​ (total assets/total​ equity).

First, find the equity of each company. The equity for PepsiCo is million. ​(Round to the nearest million​ dollars.)

Financial Information​ ($ in​ millions, 2013)
Company	Sales	Net Income	Total Assets	Liabilities
PepsiCo	​$66,321	​$6,793	​$77,483	​$53,033
​ Coca-Cola	​$46,725	​$8,423	​$90,005	​$56,836
​ McDonald's	​$28,120	​$5,844	​$36,588	​$20,633

Answer 1

For PepsiCo ($ in​ millions)

Profit margin = Net income/Sales

=$6,793/$66,321

= 0.1024

Assets turnover = Sales/Total assets

= 66,321/77,483

= 0.8559

Total equity = Total assets - Total liabilities

= 77,483 - 53,033

= $24,450

Equity multiplier = Total assets/Total equity

=$77,483/$24,450

= 3.169

Return on equity = Profit margin x Assets turnover x Equity multiplier

=0.1024*0.8559*3.169

= 0.2777

= 27.77%

For Coca Cola ($ in​ millions)

Profit margin = Net income/Sales

= 8,423/46,725

= 0.180267

Assets turnover = Sales/Total assets

= 46,725/90,005

= 0.5191

Total equity = Total assets - Total liabilities

= 90,005 - 56,836

= $33,169

Equity multiplier = Total assets/Total equity

= 90,005/33,169

= 2.7135

Return on equity = Profit margin x Assets turnover x Equity multiplier

=0.180267*0.5191*2.7135

= 0.2539

= 25.39%

For McDonald's ($ in​ millions)

Profit margin = Net income/Sales

= 5,844/28,120

= 0.2078

Assets turnover = Sales/Total assets

= 28,120/36,588

= 0.76855

Total equity = Total assets - Total liabilities

= 36,588 - 20,633

= $15,955

Equity multiplier = Total assets/Total equity

= 36,588/15,955

= 2.2931

Return on equity = Profit margin x Assets turnover x Equity multiplier

=0.2078*0.76855*2.2931

= 0.3662

= 36.62%