Great mind-twister, Hany.
Here's the alternative, classroom-type explanation.
The Dupont model is the expanded ratio analysis of Return on Equity (Net Income divided by Ave Total Equity). The former shows the importance of dissecting the analysis of the company's profitability by including the profit margin on sales, asset turnover ratio, and the equity multiplier in to the equation (Net Income/Net Sales and Net Sales/Ave Total Assets and Ave Total Assets/ Ave Total Equity where both Net Sales and Ave Total Assets get knocked off and still produce the original formula NI/Ave Equity).
The formula will look like this:
Net Profit X . Net Sales X . Ave Total Assets
Net Sales . Ave Total Assets Ave Total Equity
In solving this type of MCQ, I always use hypothetical numbers to assist me in analyzing the inc/dec in values. My starting point here is I assume some easy values, like profit is 100, sales is 1,000, assets 4,000 and, finally, equity 2,000.
Net Profit % is 100/1,000 = 10%
Asset Turnover is 1,000/4,000 = 0.25
Equity multiplier is 4,000/2,000 = 2
Hence, my original RoE is 5% (100/2,000) or (10% X 0.25 X 2).
Now, here's where the twisting part comes:
1. Equity increased 40%. If my original equity is 2,000 and it went up by 40% this year, the new equity must be 2,800 (2,000 X 140%)
2. Asset decreased by 10%. This means the new asset balance must be 3,600 (4,000 X 90%) this year.
3. Asset Turnover increased 40%. If original asset turnover (NS/Ave Asset) is 0.25, the new AT must be 0.35 (0.25 X 140%). If my revised denominator (#2) is 3,600 then the revised numerator (Net Sales) has to be 1,260 to produce the revised Asset Turnover of 0.35.
4. Net Profit Margin increased 25%. Original net profit % was 10%. If it increased by 25% the revised NP% must be 12.5%.
5. If the revised net sales (#3) is 1,260 and revised NP% (#4) is 12.5%, the new profit must be 157.50.
This year's RoE following Dupont model:
NP% . Asset Turnover Equity Multiplier
157.50/1,260 X 1,260/3,600 X 3,600/2,800 = 5.625%
Change in return on equity = (5.625% - 5%) / 5% = 12.5%
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Angel Secerio CMA, CPA
Director/Manager
Insights Financial Review Services Inc
Makati City
Philippines
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Original Message:
Sent: 06-11-2013 03:05 PM
From: Hany Dief
Subject: DuPont analysis MCQ plz Help me to solve it
Zoron Corporation experienced the following year-over-year changes.
| Net profit margin | Increased 25% |
| Total asset turnover | Increased 40% |
| Total assets | Decreased 10% |
| Total equity | Increased 40% |
Using DuPont analysis, what is the year-over-year change in Zoron's return on equity?
a. Increased 95.0%.
b. Increased 63.0%.
c. Increased 12.5%.
d. Increased 10.0%.
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the correct answer C
Why ????
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Hany Dief
Accountant
Al-Faiha Group Co For Medical Services
Riyadh
Saudi Arabia
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