Question

Below you can find the comparative financial statements of company “ABC” in € for
2017 and 2018:

Comparative Balance Sheet of “ABC”
Assets	2018	2017	Liabilities & Stockholders’ Equity	2018	2017
Fixed Assets Property, Plant and Equipment Goodwill Other Assets Total Fixed Assets Current Assets Cash and Cash Equivalents Accounts receivables Inventory Prepaid Expenses Other current assets Total Current Assets Total Assets	53,000 14,200 9,520 76,720 1,500 11,600 15,300 540 280 29,220 105,940	56,000 14,200 10,240 80,440 1,660 14,000 14,820 660 160 31,300 111,740	Shareholders’ Equity Common Stock Preferred Stock Retained Earnings Total Shareholders’ Equity Long Term Liabilities Long term debt Deferred tax liabilities Other long – term liabilities Total Long-Term Liabilities Current Liabilities Short Term debt Accounts payable Accrual liabilities Advances received Accrued tax payable Total Current Liabilities Total Liabilities Total Liabilities and Stockholders’ Equity	51,880 4,000 11,600 67,480 24,000 460 1,560 26,020 3,420 6,200 1,320 100 1,400 12,440 38,460 105,940	53,000 4,000 15,120 72,120 25,360 620 1,620 27,600 3,600 5,800 1,140 220 1,260 12,020 39,620 111,740

Also, the reported income statement for 2018 and 2017 is as follows (in thousands of
€):

Comparative Income Statement of “ABC”	2018	2017
Sales Cost of Goods Sold Gross Profit Research and Development General and Administrative expenses Operating Expenses Operating Income Interest Expense Earnings before taxes Provision for taxes Net Income	91,360 (65,080) 26,280 (2,700) (5,460) (8,160) 18,120 (3,220) 14,900 (4,200) 10,700	102,250 (80,420) 21,830 (1,300) (11,830) (13,130) 8,700 (2,200) 6,500 (1,800) 4,700

The company has decided that the total preferred dividends for 2018 are 500,000€ and for 2017 they are 300,000€. The total assets of the company for 2016 are
128,430,000€ and the total stockholders’ equity amounts to 70,110,000€.
Required:
1. Compute the three basic components of the DuPont analysis regarding the Return on Equity (ROE), for company “ABC” for 2018 and 2017.
2. Compute the ROE based on DuPont equation for 2018 and 2017.
3. Describe how each of the three basic components of the DuPont analysis (regarding the Return on Equity), explains the change in the Return on Equity for
“ABC” company from 2017 to 2018.
4. Can the level of debt affect the level of return on equity (ROE).
5. Are there any limitations concerning the assessment of Return on Equity (ROE) in analyzing profitability?

Answer 1

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