Use the data from question 1 to demonsrrate that ROE = leverage ratio x asset turnover ratio
Question:
Use the data from question 1 to demonsrrate that ROE = leverage ratio x asset turnover ratio x operating profit margin x debt burden.
Asset TurnoverAsset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio.
Income Statement (millions of dollars) Net sales 13,193 Cost of goods sold 4,060 Other expenses 4,049 2,518 Depreciation Earnings before interest and taxes (EBIT) 2,566 Statement of Financial Position (millions of dollars) End of Year Start of Year Assets: Cash and marketable securities 89 158 Receivables 2,382 2,490 Inventories 187 238 Other current assets 867 932 Total current assets 3,525 3,818 Net property, plant, and 19,973 19,915 equipment Other long-term assets 4,216 3,770 Total assets 27,714 27,503 Liabilities and shareholders' equity: Payables 2,564 3,040 Short-term debt 1,419 1,573 Other current liabilities 811 787 Total current liabilities 4,794 5,400 Long-term debt and leases 7,018 6,833 Other long-term liabilities 6,178 6,149 Shareholders' equity 9,724 9,121 Total liabilities and 27,714 27,503 shareholders' equity
Step by Step Answer:
Using this definition of ROE Average equity 9121 97242 94225 Using the DuPont formula for ...View the full answer
Fundamentals Of Corporate Finance
ISBN: 9781259087585
6th Canadian Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan, Gordon Roberts
Related Video
Depreciation of non-current assets is the process of allocating the cost of the asset over its useful life. The cost of the asset includes the purchase price, any additional costs incurred to bring the asset to its current condition and location, and any other costs that are directly attributable to the asset. The useful life of the asset is the period over which the asset is expected to be used by the company. To calculate the depreciation, companies use different methods such as straight-line, declining-balance, sum-of-the-years\'-digits, units-of-production, and group depreciation. The chosen method will depend on the type of asset, the company\'s accounting policies, and the accounting standards that are applicable. The straight-line method allocates an equal amount of the asset\'s cost over its useful life, while the declining-balance method calculates depreciation at a fixed rate, typically double the straight-line rate, but the amount of depreciation decreases over time. The sum-of-the-years\'-digits method is similar to the declining-balance method, but the rate of depreciation is calculated using a fraction that is based on the useful life of the asset. It\'s important to note that the depreciation expense will be recorded on the company\'s income statement and the accumulated depreciation will be recorded on the company\'s balance sheet. This will decrease the value of the asset on the balance sheet over time.
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