Question

*35 Find online that annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015).

a. Compute Costco’s net profit margin, total asset turnover, and equity multiplier.

b. Verify the DuPont Identity for Costco ROE.

c. If Costco managers wanted to increase its ROE by 1 percent point, how much higher would their asset turnover need to be?

Answer 1

Source of the raw data:

^{1, 2} : 10 K filing by the Company Costco Wholesale Corporation filed in OCtober 2015; retrieved from http://investor.costco.com/mobile.view?c=83830&v=200&d=3&id=10524134 on February 03, 2019

Please see the table below, which lays down step by step procedure for calculation of ROE as per Dupont method and otherwise.

Part (a) and Part (b) get covered in the table itself.

All financials in $ mn	Linkage	Costco Wholesale Corporation
		2015
Data From Income Statement1
Sales	S	116,199
Net Income	NI	2,409
Data from Balance Sheet2
Total Assets	A	33,440
Total Equity	E	10,843
Part (a): Components of ROE as per Dupont Analysis
Net profit Margin = Net Profit / Sales	NI / S	2.07%
Total Assets turnover = Sales / Total Asset	S / A	3.4749
Equity Multiplier = Assets / Equity	A / E	3.0840
Part (b) below
ROE as per Dupont Analysis (=NI/S x S/A x A/E)		22.22%
ROE (Direct method, = NI / E)		22.22%

Part (c)

If Costco managers wanted to increase its ROE by 1 percent point, how much higher would their asset turnover need to be?

ROE desired = 22.22% + 1% = 23.22% = Net profit margin x Asset turnover x Equity multiplier = 2.07% x Asset turnover x 3.0840

Hence desired asset turnover ratio = 23.22% / (2.07% x 3.0840) = 3.6313

Incremental asset turnover required = 3.6313 - 3.4749 = 0.1564

Hence, asset turnover needs to be at 3.6313, marginally higher by 0.1564 from the 2015 level of 3.4749

So, the asset trunover should be higher by