Determine the following components of the DuPont framework for 2021:

Required:
1. Determine the following components of the DuPont framework for 2021:
a. Profit margin on sales

b. Asset turnover
c. Equity multiplier
d. Return on equity
2. Write an equation that relates these components in calculating ROE. Use the Peabody Toys data to show that the equation is correct.

E 4–27

(S in thousands) 2021 2020 Income statement information Net sales $5,200 180 $4,200 Net income 124 Balance sheet information Current assets $ 800 $ 750 Property, plant, and equipment (net) 1,100 950 Total assets $1,900 $1,700 $ 600 750 Current liabilities $ 450 Long-term liabilities Common stock Retained earnings 750

Solutions

Expert Solution

a. Profit margin on sales $180 ÷ $5,200 = 3.46%

b. Asset turnover $5,200 ÷ [($1,900 + 1,700) ÷ 2] = 2.89

c. Equity multiplier [($1,900 + 1,700) ÷ 2] ÷ [($550 + 500) ÷ 2] = 3.43

d. Return on equity $180 ÷ [($550 + 500) ÷ 2] = 34.3%

Profit margin × Asset turnover × Equity multiplier = ROE

3.46% × 2.89 × 3.43 = 34.3%

Return on equity $180 ÷ [($550 + 500) ÷ 2] = 34.3%

Raffay answered 1 year ago

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