Revenue 234 EBIT 182.5 EBT 146 Net Income 94.9 Avg total assets 1200 Avg shareholder’s equity 480 I am getting 22 and answer is 20… plz help Thanks
Net Income/Avg Shareholders equity = 94.9/480 = .1977
I need effects of operating profit margin effect of nonoperating items tax effects total asset turnover financial leverage using extended dupont I am getting the one in above post is correct but we cant figure out the effects. plz help thanks
Try something like: ROE = NetIncome/Equity = (NetIncome/EBIT)*(EBIT/EBT)*(EBT/Sales)*(Sales/Assets)*(Assets/Equity) The answer should be the same though …
the formula i should use is operating income/revenue * Income before taxes/operating income * (1- taxes/income before taxes) * revenue / avg total assets * Avg total assets / Avg shareholder’s equity but I m doing something wrong while putting values…
ROE = Net Income/Avg Equity = 94.9/480 = 0.1977 Then, decompose the ROE: ROE = Net Income/Income Before Taxes * Income Before Taxes/Operating Income * Operating Income/Revenues * Revenues/Avg Total Assets * Avg Total Assets/Avg Equity = 94.9/146 * 146/182.5 * 182.5/234 * 234/1200 * 1200/480 = 0.6500 * 0.8000 * 0.7799 * 0.1950 * 2.5000 = 0.1977 Now, you will agree that all our terms are the same (your first is my third, your second is my second, your fourth is my fourth and your fifth is my fifth - it looks like your third is different from my first, but remember that Net Income/Income Before Taxes (mine) = (Income Before Taxes-Taxes)/Income Before Taxes = 1-Taxes/Income Before Taxes (yours)). Are you sure that you did 1-(Taxes/Income Before Taxes) and not (1-Taxes)/Income Before Taxes? Anyway, because the problem does not give you taxes, my version of the formula is probably easier to use in this case than yours - though they are both the same! By the way: Operating profit margin = 0.7799 Effect of nonoperating items = 0.8000 Tax effects = 0.6500 Total asset turnover = 0.1950 Financial leverage = 2.5000 I hope it helps. My two cents for the exam: rather than trying to remember the five-component formula, just make sure you can figure it out again by decomposing it. That will save you some memory space for other things.
nice explanation, frenchriviera! I was trying to point in the same direction but you did a much better job.
thanks a lottttttttttttt
=94.9/182.5*182.5/146*146/234*234/1200*1200/480 or you can just do: 94.9/480
Tax Burden * Interest burden * Ebit Margin * Asset Turnover * Financial Leverage. = (Net Income/EBT) * (EBT/EBIT) * (EBIT/Sales(revenue)) * (Sales/Assets) * (Assets/Equity) or simply Net income/Equity, but if they give u all that information I would assume they want u to use the extended model.
I find the simple ROE formula to work: ROE = Profit Margin * Total Asset Turnover * Financial Leverage Profit Margin- 94.9/234 = .40556 Total Asset Turnover- 234/1200=.195 Financial Leverage- 1200/480=2.5 ROE = .40556 *.195 * 2.5 = 19.8% or 20% rounded
EAT/EBT * EBT/EBIT * EBIT/Sales * Sales/Ave Total Assets * Ave Total Assets/Ave Total Equity= Dupont 5 part ROE
As it has been shown all forms will calculate the correct ROE. You only need to use the simple here ROE calculation here. If they asked you to make comparisons or to find why ROE increased/ decreased YOY or from one period to the next then the Dupont equations would be helpful. My take is that the exam is going to want to interpret why ROE changed using the dupont decomposition not how to calculate roe using it.