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The comparative financial statements for Prince Company are below: Year 2 Year 1 Income...

Question:

The comparative financial statements for Prince Company are below:

Year 2Year 1
Income statement:
Sales revenue$202,000$170,000
Cost of goods sold115,000101,200
Gross profit87,00068,800
Operating expenses and interest expense57,20053,600
Pretax income29,80015,200
Income tax9,2004,600
Net income$20,600$10,600
Balance Sheet:
Cash$5,200$7,600
Accounts receivable (net)14,60018,600
Inventory41,20036,400
Property and equipment (net)46,80039,200
Total assets$107,800$101,800
Current liabilities (no interest)$16,600$17,600
Long-term liabilities (10% interest)45,60045,600
Common stock ($5 par value, 6,600 shares outstanding)33,00033,000
Retained earnings12,6005,600
Total liabilities and stockholders' equity$107,800$101,800

Compute the ratios in the DuPont model for Year 2.

Return on equity_____%
Return on assets_____%
Total asset turnover_____
Net profit margin10.20%
Financial leverage_____

DuPont Analysis:

The DuPont analysis is used to decompose the return on equity into 3 components or 5 components. The 3 components for return on equity are total assets turnover ratio, net profit margin and financial leverage. For 5 components analysis, the net profit margin is further decomposed into product of operating margin, tax burden ratio and interest burden ratio.

Answer and Explanation: 1

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The total shareholders' equity at the end of Year 2 is given by:

  • = Common stock at the end of Year 2 + retained earnings at the end of Year 2
  • {eq}=...

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DuPont Analysis: Formula & Return on Equity

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Chapter 2 / Lesson 8
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Discover what the DuPont analysis in finance is. Review its importance and uses. Explore its model and formulas, and learn how to calculate it through examples.


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