# Question: The DuPont formula defines the net return on shareholders equity

The DuPont formula defines the net return on shareholders’ equity as a function of the following components:

• Operating margin

• Asset turnover

• Interest burden

• Financial leverage

• Income tax rate

Using only the data in the table shown below:

a. Calculate each of the five components listed above for 2010 and 2014, and calculate the return on equity (ROE) for 2010 and 2014, using all of the five components. Show calculations.

b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2010 to2014.

• Operating margin

• Asset turnover

• Interest burden

• Financial leverage

• Income tax rate

Using only the data in the table shown below:

a. Calculate each of the five components listed above for 2010 and 2014, and calculate the return on equity (ROE) for 2010 and 2014, using all of the five components. Show calculations.

b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2010 to2014.

## Answer to relevant Questions

David Wright, CFA, an analyst with Blue River Investments, is considering buying a Montrose Cable Company corporate bond. He has collected the following balance sheet and income statement information for Montrose as shown in ...Would you expect the required rate of return for a U.S. investor in U.S. common stocks to be the same as the required rate of return on Japanese common stocks? What factors would determine the required rate of return for ...Discuss why the two valuation approaches (present value of cash flows and the relative valuation ratios) are competitive or complementary.The Shamrock Dogfood Company (SDC) has consistently paid out 40 percent of its earnings in dividends. The company's return on equity is 16 percent. What would you estimate as its dividend growth rate?Explain the following statements: (a) There is a strong, consistent relationship between money supply changes and stock prices. (b) Money supply changes cannot be used to predict stock price movements.Post your question