I know i might seem dumb but I’m piqued. Schweser level 1 book 3 2008 page 301 Number 14 Use the following information for RGB Inc. EBIT/sales=10% Tax retention rate=60% Sales/assets=1.8times current ratio=2times Interests /assets=2% assets/equity=1.9times ROE = a 10.5% b 11.32% c 12.16% d 18.24% Any help in understanding this question would really be appreciated
I think this is a straight forward question on your understanding/memorization of the extended DuPont equation. [(EBIT/Sales)(Sales/Asstes)-(Interest/Assets)](Assets/Equity](1-t) so… (.10)(1.8)-(.02)(.6)
Extended DuPont (EBIT/Sales * Sales/Assets - Interest/Assets) * (1- Tax Rate) * (Assets/Equity) = [0.10 * 1.8 - 0.02] * 0.60 * 1.9 = 0.18240 = 18.24% = D Just gotta learn the basic- and extended DuPont equations. The basic one’s got fewer moving parts: NI/Sales * Sales/Assets * Assets/Equity = Net Profit Margin * Total Asset Turnover * Equty Multiplier = Return on Assets * Equity Multiplier There’s also: NI/Equity = ROE = NI/EBT * EBT/EBIT * EBIT/Sales * Sales/Assets * Assets/Equity Begin with memorization if that’s easiest, and through repetition this’ll become intuitive by exam day, so don’t sweat it. edit: ttouchst is too fast
You provided a more comprehensive explanation.
Thanks a bunch But the real question is How does NI/EBT * EBT/EBIT * EBIT/Sales * Sales/Assets * Assets/Equity turn to (EBIT/Sales * Sales/Assets - Interest/Assets) ]* (1- Tax Rate) * (Assets/Equity)
Look at this as ROE = NI/CE = NI / TA * TA / CE = (EBIT - Int) ( 1-t) / TA * TA / CE = [(EBIT/Sales * Sales / TA) - Int / TA] * TA / CE * (1-T) --> Last step I took the TA inside and EBIT / TA = EBIT / sales * Sales / TA This is the extended Dupont for ROE. Thanks and regards CP
Cpk123 thanks a whole bunch