Question

The DuPont formula:

a)WHAT IS THE FORMULA? (in words)

b)What is the fractional expression of the formula and

c)Cite a possible strategic implication revealed in the formula.

Answer 1

a)

The Dupont formula depicts the relationship of return on equity with the profit margin,asset turnover and equity multiplier.

ROE = Profit margin * asset turnover * Equity multiplier

b)

When we expand profit margin,asset turnover and equity multiplier with their respective formulae it becomes the fractional expression

ROE = (net income/sales) * (sales/assets) * (assets/total equity)

c)

The strategic implication here can be analyzed as, the Company can have good ROE and maintain it, and also just like perfect competition industries it can also reduce its competition by reducing the price of its commodity provided its asset turnover is increased with a stable degree of financial leverage.