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The three parts of the Dupont equation are:
Profit margin, Total asset turnover, & Equity Multiplier.
Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?
ROE = ROA × (1 + Debt − Equity Ratio).
Davis Company has provided the following financial data:
Total Asset Turnover = .245
Net Income = $400,000
Equity Multiplier = 1.20
Net Sales = $1,300,000
What is the Return on Equity?
ROE = 9.1%
******Explanation
Given:
Total Asset Turnover = .245
Net Income = $400,000
Equity Multiplier = 1.20
Net Sales = $1,300,000
Profit Margin = Net Income/Net Sales
Profit Margin = $400,000/$1,300,000 = .31
ROE = Profit Margin × Total Asset Turnover × Equity Multiplier
ROE = .31 × .245 × 1.20 = .0911
The Statement of Cash Flows has all of the following categories, except:
Standard
****The Statement of Cash Flows has Operating, Financing, and Investment activities.
You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information:
Beginning Cash:
Ending Cash: $285
Net cash increase: $102
Calculate the Beginning Cash.
Beginning Cash: $183
***Ending Cash: $285 + Net cash increase: $102
You are analyzing the Statement of Cash flows for Coffey Corporation. You have the following information:
Beginning Cash: $220
Operating Activity: $497
Investment Activity $598
Financing Activity: −$212
Calculate the Net cash increase/decrease:
Net Increase in cash: $883
****Explanation
The Beginning cash amount is not part of the calculation.
Operating Activity: $497
Investment Activity$598
Financing Activity: − $212
497 + 598 - 212 = 883
Which one of the following is a working capital management decision?
Should the firm pay cash for a purchase or use the credit offered by the supplier?
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
Capital structure
Which one of the following questions is least likely to be addressed by financial managers?
How should a product be marketed?
The most recent financial statements for Bello Co. are shown here:
Income Statement Balance Sheet
Sales $20,000 Current assets $43,126 Debt $42,504
Costs
12,000
Fixed assets 30,178 Equity 30,800
Taxable income $8,000 Total
$73,304
Total
$73,304
Taxes (24%) 1,920
Net income
$6,080
Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 18 percent dividend payout ratio.
What is the sustainable growth rate?
19.31%
***Explanation
To calculate the sustainable growth rate, we first need to calculate the ROE, which is:
ROE = NI / TE
ROE = $6,080 / $30,800
ROE = 0.1974, or 19.74%
The plowback ratio, b, is one minus the payout ratio, so:
b = 1 - 0.18
b = 0.82
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]
Sustainable growth rate = [0.1974(0.82)] / [1 - 0.1974(0.82)]
Sustainable growth rate = 0.1931, or 19.31%
Assume the following ratios are constant.
Total asset turnover 1.29
Profit margin 8.3%
Equity multiplier 1.2
Payout ratio 61%
What is the sustainable growth rate?
5.28%
**Explanation
We must first calculate the ROE using the DuPont ratio to calculate the sustainable growth rate.
The ROE is:
ROE = (PM)(TAT)(EM)
ROE = (0.083)(1.29)(1.2)
ROE = 0.1285, or 12.85%
The plowback ratio is one minus the dividend payout ratio, so:
b = 1 - 0.61
b = 0.39
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 - (ROE × b)]
Sustainable growth rate = [0.1285(0.39)] / [1 - 0.1285(0.39)]
Sustainable growth rate = 0.0528, or 5.28%
The variables in a future value of a lump sum problem include all of the following, except:
Payments
*** Explanation
Since this is a future value of a lump sum, there are no payments to be considered
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value.
***Explanation
A decrease in the interest rate would mean that the money invested would earn less interest and therefore, be a smaller amount in the future.
What is the future value of $1,000 invested for 15 years at a rate of 5%?
$2,079
***Explanation
Financial calculator key strokes:
N = 15
I/YR = 5
PV = $1,000
PMT = $0
FV = ??? = $2,079
The variables in a future value of a lump sum problem include all of the following, except:
Payments
***Explanation
Since this is a future value of a lump sum, there are no payments to be considered.
How would a decrease in the interest rate effect the future value of a lump sum, single amount problem (all other variables remain the same)?
Decrease the future value.
What is the future value of $1,000 invested for 15 years at a rate of 5%?
$2,079
***Explanation
Financial calculator key strokes:
N = 15
I/YR = 5
PV = $1,000
PMT = $0
FV = ??? = $2,079
The variables in a present value of a lump sum problem include all of the following, except:
Payments
How would a decrease in the interest rate effect the present value of a lump sum, single amount problem (all other variables remain the same)?
Increase the present value.
What is the present value of $1,200 to be received in 18 years invested at a rate of 5%?
$499
***Explanation
Financial calculator key strokes:
N = 18
I/YR = 5
PMT = $0
FV = $1,200
PV= ??? = $499
The variables in a future value of a lump sum problem include all of the following, except:
Usage
A common error made when solving a future value of an annuity problem is:
Multiplying the annual deposit and the number of years before calculating the problem.
What is the future value of $400 invested each year for 15 years at a rate of 6%?
$9,310
****Explanation
Financial calculator key strokes:
N = 15
I/YR = 6
PV = $0
PMT = $400
FV = ??? = $9,310
