Fight Finance

Question 857  Du Pont formula, accounting ratio

The Du Pont formula is:

###\dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###

Which of the following statements about the Du Pont formula is NOT correct?

(a) The Du Pont formula gives the book Return on Equity (ROE).

(b) The net profit to sales ratio is called the ‘gross profit margin’.

(c) The sales to total assets ratio is called the ‘total asset turnover’ ratio.

(d) The total assets to owners' equity ratio is called the ‘equity multiplier’.

(e) The equity multiplier and ROE will rise if the firm uses more leverage by replacing equity with debt.

Question 983  corporate financial decision theory, Du Pont formula, accounting ratio

A company manager is thinking about the firm's book assets-to-equity ratio, also called the 'equity multiplier' in the Du Pont formula:

###\text{Equity multiplier} = \dfrac{\text{Total Assets}}{\text{Owners' Equity}}###

What's the name of the decision that the manager is thinking about? In other words, the assets-to-equity ratio is the main subject of what decision?

(a) Investment decision.

(b) Financing decision.

(c) Working capital decision.

(d) Payout policy decision.

(e) Capital or labour decision.

Note: Du Pont formula for analysing book return on equity:

###\begin{aligned} \text{ROE} &= \dfrac{\text{Net Profit}}{\text{Sales}} \times \dfrac{\text{Sales}}{\text{Total Assets}} \times \dfrac{\text{Total Assets}}{\text{Owners' Equity}} \\ &= \text{Net profit margin} \times \text{Total asset turnover} \times \text{Equity multiplier} \\ \end{aligned}###