In Schweser, Book 3 (FSA), Assigned Reading #41 on Financial Analysis Techniques, Concept Checkers, Questions 14 and 16, Schweser cites (in its solution to each of the questions) the following formulae: ROE = [(EBIT/S) (S/A) - (I/A)] (A/E) (1-t). where did this come from? the only extended Dupont equation they told us about was: (net income / EBIT) X (EBT / EBIT) X (EBIT / Revenue) X (Revenue / Total Assets) X (Total Assets / Total Equity) how do these two equations relate to each other?
Simple Algebra does it: ROE=NI/CE = (EBIT-Int)*(1-T)/CE = (EBIT-Int)/CE * (1-T) = (EBIT-Int)/TA * TA/CE * (1-T) = (EBIT/TA - Int / TA) * TA/CE * (1-T) = [(EBIT/NS * NS /TA) - Int /TA] * TA/CE * (1-T) = [(Operating Profit Margin * Total Asset Turnover) - Int Coverage] * Fin. Leverage * (1-T) CP
CPK- Thanks for this. I see what you did. The sample questions in which this comes up requires one to be able to use this equation. But how would one have known this equation? Is one expected to derive it on the spot from the standard dupont equation? Thanks, CND
I am pretty sure this is discussed in the text as the 5 part Extended Dupont equation. You could memorize it, or if you see a question, push it to the end of the exam, derive the equation (in case you forgot parts of it) and then solve it then. CP