Question

Henderson's Hardware has an ROA of 12%, a 8% profit margin, and an ROE of 17%.

a.) What is its total assets turnover? Round your answer to two decimal places.

b.) What is its equity multiplier? Round your answer to two decimal places.

**** PLEASE. LABEL BOTH ANSWERS CLEARLY*****

Answer 1

a.) We need to use DuPont analysis to get total assets turnover and equity multiplier.

basic DuPont model is as below:

ROE = Net profit margin*total assets turnover*equity multiplier; or

ROE = (Net income/sales)*(Sales/total assets)*(Total assets/common equity)

In the question we have been given ROE, ROA and profit margin.

ROA = Net income/total assets or avg. assets; we can re-write this formula as below:

ROA = net profit margin*assets turnover; or ROA = (Net income/sales)*(Sales/total assets). Sales in both net profit margin and assets turnover formula will cancel out each other and remaining would be ROA or Net income/total assets.

12% = 8%*assets turnover

Total Assets turnover = 12%/8% = 1.50

So, total assets turnover is 1.50.

b.) again we will use DuPont analysis model to compute equity multiplier.

ROE = Net profit margin*total assets turnover*equity multiplier

0.17 = 0.08*1.5*equity multiplier

0.17 = 0.12*equity multiplier

Equity multiplier = 0.17/0.12 = 1.42

So, equity multiplier is 1.42.