Question

DuPont identity.  For the firms in the popup​ window, LOADING...​, 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).

Company   Sales   Net Income   Total Assets   Liabilities
PepsiCo   $66,402   $6,602   $77,356   $53,181
Coca-Cola   $46,869   $8,468   $89,915   $56,730
McDonald's   $28,047   $5,849   $36,681   $20,502

Answer 1

PepsiCo.:

Profit Margin = Net Income / Sales
Profit Margin = $6,602 / $66,402
Profit Margin = 9.94%

Total Asset Turnover = Sales / Total Assets
Total Asset Turnover = $66,402 / $77,356
Total Asset Turnover = 0.86

Equity Multiplier = Total Assets / (Total Assets - Liabilities)
Equity Multiplier = $77,356 / ($77,356 - $53,181)
Equity Multiplier = 3.20

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier
Return on Equity = 9.94% * 0.86 * 3.20
Return on Equity = 27.35%

Coca-Cola:

Profit Margin = Net Income / Sales
Profit Margin = $8,468 / $46,869
Profit Margin = 18.07%

Total Asset Turnover = Sales / Total Assets
Total Asset Turnover = $46,869 / $89,915
Total Asset Turnover = 0.52

Equity Multiplier = Total Assets / (Total Assets - Liabilities)
Equity Multiplier = $89,915 / ($89,915 - $56,730)
Equity Multiplier = 2.71

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier
Return on Equity = 18.07% * 0.52 * 2.71
Return on Equity = 25.46%

McDonald’s:

Profit Margin = Net Income / Sales
Profit Margin = $5,849 / $28,047
Profit Margin = 20.85%

Total Asset Turnover = Sales / Total Assets
Total Asset Turnover = $28,047 / $36,681
Total Asset Turnover = 0.76

Equity Multiplier = Total Assets / (Total Assets - Liabilities)
Equity Multiplier = $36,681 / ($36,681 - $20,502)
Equity Multiplier = 2.27

Return on Equity = Profit Margin * Total Asset Turnover * Equity Multiplier
Return on Equity = 20.85% * 0.76 * 2.27
Return on Equity = 35.97%