Question: Suppose that an analyst has noticed that the return on equity of the XYZ Company has declined from 2012 to 2013. (millions) 2013 2012 Sales

Suppose that an analyst has noticed that the return on equity of the XYZ Company has declined from 2012 to 2013.

(millions)

2013

2012

Sales

$1,000

$900

Earnings before interest and taxes

$400

$380

Interest expense

$30

$30

Taxes

$100

$90

Total assets

$2,000

$2,000

Shareholders’ equity

$1,250

$1,000




a. Calculate the followings for 2013 and 2012

Return on equity

Return on assets

Financial leverage ratio

Total asset turnover

Net profit margin

Operating profit margin


b. Using the DuPont formula, explain the source of this decline.

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