Question

Last year XYZ (Pty) Ltd had sales of R202 601, assets of R126 178, a profit margin of 5.3%, and an equity multiplier of 1.3. The CFO believes that the company could reduce its assets by R20154 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt-to-asset ratio, sales and costs remained constant, by how much would the ROE have changed?

Answer 1

Answer :

As per Du pont Analysis :

Calculation of ROE Before reduction of assets :

ROE as per Du pont Analysis = Profit Margin * Asset Turnover * Equity Multiplier

Asset Turnover = Sales / Total Assets

= 202601 / 126178

= 1.60567610835

ROE as per Du pont Analysis = 5.3% * 1.60567610835 * 1.3

= 11.0631%

Calculation of ROE After reduction of assets :

ROE as per Du pont Analysis = Profit Margin * Asset Turnover * Equity Multiplier

Asset Turnover = Sales / Total Assets

= 202601 / (126178 - 20154)

= 202601 / 106024

= 1.91089753263

ROE as per Du pont Analysis = 5.3% * 1.91089753263 * 1.3

= 13.1661%

ROE is changed by 2.10% (13.1661% - 11.0631%)