Summary Business Accounting

Question:

This exercise is based on the Peabody Toys, Inc., data from Exercise 5–25.

Required:

1. Determine the following components of the DuPont framework for 2013:

a. Profit margin on sales.

b. Asset turnover.

c. Equity multiplier.

d. Return on shareholders’ equity.

2. Write an equation that relates these components in calculating ROE. Use the Peabody Toys data to

show that the equation is correct.



Answer:



Requirement 1

a. Profit margin on sales $180 ÷ $5,200 = 3.46%

b. Asset turnover $5,200 ÷ [($1,900 + 1,700) ÷ 2] = 2.89

c. Equity multiplier [($1,900 + 1,700) ÷ 2] ÷ [($550 + 500) ÷ 2] = 3.43

d. Return on shareholders’ equity $180 ÷ [($550 + 500) ÷ 2] = 34.3%

Requirement 2

Profit margin x Asset turnover x Equity multiplier = ROE

3.46% x 2.89 x 3.43 = 34.3%