2019-02-14T11:11:31+00:00 Essays

Compute ROA Dupont Formula Financing Cash Requirements

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Compute ROA Dupont Formula Financing Cash Requirements

Please see attachment for detailed info on 2 questions (in better format):

The DuPont Analysis method is based on a series of relationships among financial ratios:
Net Profit Margin x Total Asset Turnover = Return on Assets
and
Net Profit Margin x Total Asset Turnover x Leverage Ratio = Return on Equity

Using data from www.att.com and www.vonage.com financial statements, compare the profit margin, asset turnover, leverage ratio (i.e. assets/equity), ROA, and ROE. Please present the data in a similar format as shown in the example below.

Discuss what each of these metrics tells you about each company`s performance.
Example

ROA = Profit Margin x Asset Turnover

ROA = net income x revenue
revenue total assets

ROA = 15,000 x 250,000
250,000 125,000

ROA = 0.060 x 2.00 = 0.120

ROA = 6.0% x 2.00 = 12.0%

ROE = ROA x Leverage Ratio

ROE = Profit Margin x Asset Turnover x Leverage Ratio

ROE = net income x revenue x total assets
revenue total assets total equity

ROE = 15,000 x 250,000 x 125,000
250,000 125,000 45,000

ROE = 0.060 x 2.00 x 2.78 = 0.333

ROE = 6.0% x 2.00 x 2.78 = 33.3%

Question 2

Apply the External Financing model process to www.att.com.

Take the company`s most recent financial statements and project a 10% increase in sales.

Determine whether AT&T will have a capital surplus (i.e. spontaneous financing will be enough to pay for the required assets), or whether external financing would be needed to support the projected increase in sales.

Here`s an example:
INCOME STATEMENT 2009 change projected

Total Revenue 250,000 + 10% 275,000
Net Income 15,000 + 10% 16,500
dividends paid 5,000 + 10% 5,500
addition to retained earnings 10,000 + 10% 11,000

(note: Net Income - Dividends Paid = Addition to Retained Earnings)

BALANCE SHEET 2009 change projected

TOTAL ASSETS 125,000 + 10% 137,500

Current Liabilities 10,000 + 10% 11,000
Non-Current Liabilities 70,000 none 70,000

addition to
Total Equity 45,000 retained earnings 56,000

TOTAL LIABILITIES + EQUITY 125,000 137,000

CAPITAL SURPLUS or
EXTERNAL FINANCING NEEDED -500



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