Question: The Du Pont formula defines the net return on shareholders equity as a function of the following components: Operating margin Asset turnover

The Du Pont formula defines the net return on shareholders€™ equity as a function of the following components:

€¢ Operating margin

€¢ Financial leverage

€¢ Income tax rate

The Du Pont formula defines the net return on shareholders€™

Using only the data in Table 17H,
a. Calculate each of the five components listed above for 2013 and 2014, and calculate the return on equity (ROE) for 2013 and 2014, using all of the five components.
b. Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2013 to 2014.

2013 2014 Income Statement Data Revenues Operating income Depreciation and amortization Interest expense Pretax income Income taxes Net income after tax Balance Sheet Data Fixed assets Total assets Working capital Total debt Total shareholders' equity $542 38 $979 76 9 32 13 19 67 37 30 41 245 123 16 159 70 291 157 220

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a Using the Du Pont formula ROE 10 5 3 1 2 4 ROE2013 5937 914 065 221 154 120 120 ROE2014 4478 10 06... View full answer

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