Question

Construct the Du Pont Equations for Prospec. What does it tell us?

	20X7	20X8	20X8
Sales	$1,578	$2,106	$3,265
COGS	631	906	1,502
Gross Margin	$   947	$1,200	$1,763
Expenses
Marketing	$316	$495	$882
R & D	158	211	327
Admin.	126	179	294
Total Expenses	$   600	$   885	$1,503
EBIT	$347	$315	$260
Interest	63	95	143
EBT	$284	$220	$117
Tax	97	75	40
EAT	$187	$145	$ 77

	20X7	20X8	20X9
ASSETS
Cash	$     30	$     40	$     62
Accounts Receivable	175	351	590
Inventory	90	151	300
Current Assets	$    295	$    542	$    952
Fixed Assets
Gross	$1,565	$2,373	$2,718
Accum. Depreciation	(610)	(860)	(1,135)
Net	$   955	$1,513	$1,583
Total Assets	$1,250	$2,055	$2,535
LIABILITIES
Accounts Payable	$56	$81	$134
Accruals	15	20	30
Current Liabilities	$71	$101	$164
Capital
Long-Term Debt	$630	$1,260	$1,600
Equity	549	694	771
Total Liability & Equity	$1,250	$2,055	$2,535

Answer 1

DUPONT EQUATION:

In Dupont equation,the ROE is calculated on the whole splitting up into 3parts which are the profit margin,asset turn over,financial leverage.

Hence these three can be differentiated to analyse the company position on a whole based on the three factors.

ROE=PROFIT MARGIN*ASSET TURNOVER*FINANCIAL LEVARAGE

ROE=NET INCOME/SALES*SALES/TOTAL ASSETS*TOTAL ASSETS/AVERAGE SHAREHOLDERS EQUITY

FOR YEAR 2017

ROE=187/1578*1578/1250*1250/549

=0.12*1.26*2.27=0.34

For year 2018

ROE=145/2106*2106/2055*2055/694

=0.07*1.02*2.96=0.21

FOE YEAR 2019,

ROE=77/3265*3265/2535*2535/771

=0.02*1.29*3.28=0.09

Hence we can analyse the current situation I.e..., ROE by analysing the three situations and by comparing them with ideal situations.