Finance Question

The DuPont formula defines the net return on shareholders’ equity as a function of the following components:

·         Operating margin

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·         Asset turnover

·         Interest burden

·         Financial leverage

·         Income tax rate

Using only the data in the table shown below:

a.       Calculate each of the five components listed above for 2010 and 2014, and calculate the return on equity (ROE) for 2010 and 2014, using all of the five components. Show calculations.

b.      Briefly discuss the impact of the changes in asset turnover and financial leverage on the change in ROE from 2010 to 2014

INCOME STATEMENT DATA                 2010          2014

Revenues                                                       $542          $979

Operating income                                            38              76

Depreciation and amortization                         3                9

Interest expense                                                3                0

Pretax income                                                 32               67

Income taxes                                                   13              37

Net income after tax                                        19             30

BALANCE SHEET DATA                          2010           2014 

Fixed assets                                                   $41             $70

Total assets                                                   245              291

Working capital                                            123             157

Total debt                                                      16                 0

Total shareholders’ equity                            159             220