Question

Question 3: We have the following data of ABC Inc. for 2017: Sales = $150 million Total assets at the begginning of the year = $100 million The net profit margin = 8% The debt to equity at the beginning of the year = 0.8 The plowback ratio = 0.5 Calculate i) The levels of debt and equity of ABC at the beginning of the year? ii) The three components of the Dupont system of financial ratios.? iii) The sustainable growth rate of the firm?

Answer 1

i) Debt = D/E / (1 + D/E) x Assets = 0.8 / (1 + 0.8) x 100 = $44.44 million

Equity = 100 - 44.44 = $55.55 million

ii) DuPont, ROE = Net Income / Sales x Sales / Assets x Assets / Equity = Net Profit Margin x Asset Turnover x Equity Multiplier

Net Profit Margin = 8%

Asset Turnover = 150 / 100 = 1.50

Equity Multiplier = Assets / Equity = 100 / 55.55 = 1.8

=> ROE = 8% x 1.50 x 1.8 = 21.60%

iii) Sustainable growth rate = ROE x plowback ratio = 21.60% x 50% = 10.80%