Question

It is commonly known that the DuPont system decomposes ROE into the following components: ROE =...

It is commonly known that the DuPont system decomposes ROE into the following components:

ROE = (Net Profits/Pretax Profits) x (Pretax Profits/EBIT) x (EBIT/Sales) x (Sales/Assets) x (Assets/Equity)

Please select and enter the formula that corresponds to the description of each ratio into the second column of the table. The third column gives a value for each ratio. Use the fourth column to describe the meaning of the ratio's value.

Margin
0.15

Turnover
0.90

Leverage
1.28

Interest Burden
0.76

Tax Burden
0.28

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Answer #1

Margin=Net Profits/Sales
Measure of profitability, percentage of revenue remaining after all expenses, tax and interest is deducted

Turnover=Sales/Assets
Measure of efficiency of use of assets in generating revenue

Leverage=Assets/Equity
Measure of the borrowed money, the amount of assets for 1 $ of equity

Interest Burden=Pretax Profits/EBIT
Ratio of EBT/EBIT. Percentage of EBIT left after deduction of interest

Tax Burden=Net Profits/Pretax Profits
Ratio of Net Income/EBT. Percentage of EBT left after deduction of taxes

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