   Chapter 4, Problem 3P Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

Solutions

Chapter
Section Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

DuPONT ANALYSIS Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its total assets turnover? What is its equity multiplier?

Summary Introduction

To determine: Total assets turnover and its equity multiplier.

DuPont Analysis: Under DuPont analysis, return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.

Explanation

Solution:

Given,

Return on assets (ROA) is 10%.

Profit margin is 2%.

Return on equity (ROE) is 15%.

As per DuPont equation:

Formula to calculate total assets turnover ratio,

Total assets turnoverratio=ROAProfitmargin

Substitute 10% for ROA and 2% for profit margin in the formula,

Total assets turnoverratio=10%2%=5×

Here, total assets turnover ratio is 5×

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