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Compute ROA Dupont Formula Financing Cash Requirements

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Please see attachment for detailed info on 2 questions (in better format):

The DuPont Analysis method is based on a series of relationships among financial ratios:
Net Profit Margin x Total Asset Turnover = Return on Assets
Net Profit Margin x Total Asset Turnover x Leverage Ratio = Return on Equity

Using data from www.att.com and www.vonage.com financial statements, compare the profit margin, asset turnover, leverage ratio (i.e. assets/equity), ROA, and ROE. Please present the data in a similar format as shown in the example below.

Discuss what each of these metrics tells you about each company's performance.

ROA = Profit Margin x Asset Turnover

ROA = net income x revenue
revenue total assets

ROA = 15,000 x 250,000
250,000 125,000

ROA = 0.060 x 2.00 = 0.120

ROA = 6.0% x 2.00 = 12.0%

ROE = ROA x Leverage Ratio

ROE = Profit Margin x Asset Turnover x Leverage Ratio

ROE = net income x revenue x total assets
revenue total assets total equity

ROE = 15,000 x 250,000 x 125,000
250,000 125,000 45,000

ROE = 0.060 x 2.00 x 2.78 = 0.333

ROE = 6.0% x 2.00 x 2.78 = 33.3%

Question 2

Apply the External Financing model process to www.att.com.

Take the company's most recent financial statements and project a 10% increase in sales.

Determine whether AT&T will have a capital surplus (i.e. spontaneous financing will be enough to pay for the required assets), or whether external financing would be needed to support the projected increase in sales.

Here's an example:
INCOME STATEMENT 2009 change projected

Total Revenue 250,000 + 10% 275,000
Net Income 15,000 + 10% 16,500
dividends paid 5,000 + 10% 5,500
addition to retained earnings 10,000 + 10% 11,000

(note: Net Income - Dividends Paid = Addition to Retained Earnings)

BALANCE SHEET 2009 change projected

TOTAL ASSETS 125,000 + 10% 137,500

Current Liabilities 10,000 + 10% 11,000
Non-Current Liabilities 70,000 none 70,000

addition to
Total Equity 45,000 retained earnings 56,000



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Solution Summary

This solution gives the student the process for dis-aggregating ROA and interpreting the parts. The second problem is an analysis of cash requirements.

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