   Chapter 4, Problem 6P 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 AND ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of$50 million. What is its ROE?

Summary Introduction

To determine: Return on equity.

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,

Equity multiplier is 2.0.

Profit margin is 2%.

Calculated values (working note),

Return on Assets is 4%.

As per DuPont equation:

Formula to calculate return on equity,

Return on equity=(Profitmargin×Total assets turnoverratio×Equity multiplier)=2%×2×2=8%

Working note:

Given,

Sales are \$100 million

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