Question

Apply DuPont Disaggregation of ROE
Selected balance sheet and income statement information for Home Depot follows.

$ millions	Jan. 31, 2016	Feb. 01, 2015
Total assets	$43,179	$40,576
Total liabilities	36,413	30,804
Sales	89,599
Net income	7,013

Round answers to two decimal places (ex: 0.12345 = 12.35%)

a. Compute ROE and disaggregate the ratio into its DuPont components of ROA and financial leverage.
ROE: Answer

%
ROA: Answer

%
Financial leverage: Answer

b. Disaggregate ROA in to profitability and productivity components.
Profit margin Answer

%
Asset turnover Answer

Answer 1

a. Compute ROE (Return on equity) =Net income / Average Shareholder's equity.

{Here we take total liability as shareholder's equity because net income is given seperate and hence we assume total liability as shareholder's equity}

# Average shareholder's equity = (36413+30804)/2

  = 33608.5

Net income = 7013

ROE = 7013/33608.5

= 0.2086 or 20.87%

Disaggregate according to Du-pont equation -

Return on Assets (ROA) = Net income / Average total assets

Average total assets = (43,179 + 40,576)/2

= 41,877.5

Net income = 7,013

Return on Assets = 7013/41877.5

= 0.1674 or 16.74%

Financial leverage = Average total assets/ Average total equity

= 41877.5/33608.5

= 1.2460 or 124.60%

Disaggregate ROA -

Profitability component is Net profit margin or net income margin -

Net profit margin = (Net income / sales)*100

= (7019/89,599)*100

= 7.83%

Productivity component -

Asset turnover ratio = Sales / Average total assets

Sales = 89,599

Average total assets = (43,179 + 40,576)/2

= 41,877.5

Asset turnover ratio  = 89,599/41877.5

= 2.1395 or 213.95%