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Use the information provided below to answer questions a, b and c. Company DEF Company GHI...

Use the information provided below to answer questions a, b and c. Company DEF Company GHI Total Sales = $8,000 Total Sales = $8,000 Net Income = $1,000 Net Income = $1,333 Total Assets = $40,000 Total Assets = $30,000 Total Equity = $10,000 Total Equity = $13,333
a. Construct a DuPont Model for Company DEF
b. Construct a DuPont Model for Company GHI
c. Given the information in a and b above, is one firm more profitable AND more efficient?

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Answer #1

a)

For DEF Co,

Total Sales = $ 8000

net Income = $ 1000

Total assets = 40,000

Total Equity = 10,000

Using DuPont , Return on Equity (ROE) = Profitability * Asset turnover * Leverage

= (Net Income/Total Sales) * (Sales/ Total Assets) * (Assets/ Total Equity)

= (1000/8000) * (8000/40,000) * (40,000/10,000) = 0.125 * 0.2 * 4 = 10%

For GHI

Total Sales = $ 8000

net Income = $ 1333

Total assets = 30,000

Total Equity = 13,333

Using DuPont , Return on Equity (ROE) = Profitability * Asset turnover * Leverage

= (Net Income/Total Sales) * (Sales/ Total Assets) * (Assets/ Total Equity)

= (1,333/8000) *(8000/30,000) * (30,000/13,333)

= 0.167 * 0.267 * 2.25 = 9.997%

c)

From above Firm GHI is more profitable with 16.7% and efficient with 0.267 times against 12.5% and 0.2 times for DEF respectively.

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