Total Asset of Brook Inc. is 1.80 times of its Total Equity. ROA is 9.6% and Tot
ID: 2632068 • Letter: T
Question
Total Asset of Brook Inc. is 1.80 times of its Total Equity. ROA is 9.6% and Total Equity is $ 800,000. Profit Margin is 40%. At the year end, Brook Inc. has paid $41,472 as cash dividends. Find out the following information: a) Equity Multiplier 01 point a) Debt to Equity Ratio 01 point b) Net Income 01 point c) Total Asset 01 point d) Total Equity 01 point e) Sales 01 point f) Retained Earnings 01 point g) Total Asset Turn Over 01 point h) Dividend Pay Out Ratio 01 point i) Retention Ratio 01 point j) Show that Du Pont Identity holds for Brook Inc. 02 point k) As a manager, how would you interpret Du Pont Identity? What are additional insights Du Pont Identity may provide you that other ratios may not? Explain in your own language. 03 point
Explanation / Answer
Total Asset of Brook Inc. is 1.80 times of its Total Equity. ROA is 9.6% and Total Equity is $ 800,000. Profit Margin is 40%. At the year end, Brook Inc. has paid $41,472 as cash dividends. Find out the following information:
Equity Multiplier = Total assets /common stockholder's equity
Equity Multiplier = 1.8/1= 1.8
Debt to Equity Ratio = (1.8-1)/1= 0.8
Net Income =ROA*Total asset
Net income = 9.6%*1.8*800000=138240
d) Total Asset =1.8*800000= 1440000
d) Total Equity = $800,000
e) Sales = Net income/Profit margin =138240/40%= 345600
f) Retained Earnings =$138240- 41472= $96768
g) Total Asset Turn Over = sales/asset = 345600/1440000=0.24
h) Dividend Pay Out Ratio = 41472/138240 = 0.30
i) Retention Ratio = 1-0.3= 0.70
j) Duo Pont identity states that
ROE = Profit Margin * Asset Turnover * Assets / Equity
ROE = 40%*0.24*1.8
138240/800000= 40%*0.24*1.8
17.28% = 17.28%
Both right hand side and lefft hand side are same and hence duo pont identity holds
k)
The Du Pont identity tells us that ROE is affected by three things:
1.
Operating efficiency (as measured by profit margin).
2.
Asset use efficiency (as measured by total asset turnover).
3.
Financial leverage (as measured by the equity multiplier).
Weakness in either operating or asset use efficiency (or both) will show up in a diminished return on assets, which will translate into a lower ROE. As a manager, If ROE is unsatisfactory, the Du Pont identity will help me locate the part of the business that is underperforming
1.
Operating efficiency (as measured by profit margin).
2.
Asset use efficiency (as measured by total asset turnover).
3.
Financial leverage (as measured by the equity multiplier).