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

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

DuPONT ANALYSIS Henderson’s Hardware has an ROA of 11%, a 6% profit margin, and an ROE of 23%. What is its total assets turnover? What is its equity multiplier?

Summary Introduction

To determine: Total assets turnover and its equity multiplier.

Introduction:

DuPont Analysis:

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

Explanation

Given,

Return on assets (ROA) is 11%.

Profit margin is 6%.

Return on equity (ROE) is 23%.

As per DuPont equation:

Formula to calculate total assets turnover ratio,

Total assets turnoverratio=ROAProfitmargin

Substitute 11% for ROA and 6% for profit margin in the formula,

Total assets turnoverratio=11%6%=1.83×

Here, total assets turnover ratio is 1.83×

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