Question

Finance Help !

The DuPont system focuses on: Return on Equity (ROE), it shows how the factors below combine to determine the ROE. Why are ROE and these factors the principle concern for both senior management as well as investors (shareholders, lenders, and other investors), explain the importance.

A.) Expense Control (Project Margin)

B.) Asset Utilization (Total Asset Turn Over)

C.) Debt Utilization (Equity Multiplier)

3. The DuPont system focuses on Ream On Equity (ROE). It shows how the factors below combine to determine the ROE Why the factors the prindele concern for both senior management as well as restors shareholders, anders, and other intors in the importance. 20 inte 2. Sense control Prat Margin) Asset utilization. To S e t Debt tation u lled

Answer 1

Return On Equity (ROE) is a tool for measuring the financial performance of a company that how effectively the management is using a company’s assets to generate profits for the shareholders, lenders and investors. On the basis of ROE the senior management takes business decisions to be implemented. ROE is the net income that is available to shareholders only. ROE is calculated using the below mentioned formula :

Return on Equity = Net Income / Average Shareholders’ Equity ​​

Where, Net Income is the amount of income after deducting all the expenses and taxes of a company for a given period and Average Shareholders’ Equity is calculated by taking the average shareholder equity from at least two consecutive periods and average that.

Expense control (Profit Margin) is a tool that defines the profitability margin in a business proposal and is used for accepting or rejecting a business proposal on comparing required profit margin with expected profit margin in a particular business proposal. Expense control shall lead to the achievement of ROE that a company usually generate and hence it is the principle concern for both senior management as well as investors.

Asset utilization (Total Asset Turn Over) is a performance indicator that determines whether a company is utilizing its resources effectively or not. Total asset turnover is a financial ratio that measures the efficiency of a company to use its assets in generating revenue while achieving the required profit margin to maintain the ROE achieved in past years.

Debt utilization (Equity Multiplier) is a measure to assess the financing component to finance the total assets of a company. It is a financial leverage ratio that measures the amount of total assets that are financed by its shareholders or lenders. This ratio leads to optimizing the cost of capital of a company so that the return on equity shall be maximized and hence equity multiplier is also one of the factors that is the principle concern for both senior management as well as the Investors.