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Fi
Financial
i l Statement
St t
t Analysis
A l i Module
M d l
DuPont System
ROE
ROE=(Profit
(Profit Margin)x(Asset Turnover)x(Equity Multiplier)
Profit Margin=NI/Revenues
Asset Turnover
Turnover=Revenues/Total
Revenues/Total Assets
Equity Multiplier=Total Assets/Equity
ROE=(EBIT/Revenues)x(EBT/EBIT)x[1-(Taxes/EBT)]x
(Re en es/Total Assets)x(Total
(Revenues/Total
Assets) (Total Assets/Equity)
Assets/Eq it )
In this form ROE expressed as a function of:
(Operating Margin) x (Effect of Non-Operating Items) x
(Tax Effect) x (Total Asset Turnover) x (Financial Leverage)
Dr. C. Bulent Aybar
Example
Solution
ROE
ROE=Profit
Profit Margin x Asset Turnover x Equity Multiplier
Example
Last year Swensen Corp.
Corp had sales of $303
$303,225,
225 operating
costs of $267,500, and year-end assets of $195,000.
The debt-to-total-assets ratio was 27%,
%, the interest rate on
the debt was 8.2%, and the firm's tax rate was 37%.
The new CFO wants to see how the ROE would have been
affected if the firm had used a 45% debt ratio.
Assume that sales and total assets would not be affected, and
that the interest rate and tax rate would both remain constant.
By how much would the ROE change in response to the
change
h
i the
in
th capital
it l structure?
t t ?
Dr. C. Bulent Aybar
ROE=(0.1178)x(0.8791)x(0.63)x(1.55)x(1.39)=13.9%
ROE=(0.1178)x(0.7986)x(0.63)x(1.55)x(1.82)=16.76%
Difference=16.8-13.9=2.9%
Dr. C. Bulent Aybar
Pro-forma Analysis
Pro forma financial statements are projected,
projected or forecast,
forecast
financial statements income statements and balance sheets.
The inputs required to develop pro forma statements using
the most common approaches include:
Financial statements from the pprecedingg yyear
The sales forecast for the coming year
Key assumptions about a number of factors
Step
p 2: Preparing
p
g the Pro Forma Income Statement
A simple method for developing a pro forma income statement is the
percent-of-sales method.
This method starts with the sales forecast and then expresses the cost of
goods sold, operating expenses, and other accounts as a percentage of
projected sales.
2005 %ofSales
10,000
100%
5 500
5,500
55%
4,500
45%
800
8%
3,700
37%
500
5%
3,200
960
2 240
2,240
BalanceSheetEndofYear
Current Assets
CurrentAssets
NetPlantandEquipment
TotalAssets
CurrentLiabilities
LongTermDebt
ConnonStock&PaidinCapital
RetainedEarnings
Total Liabilities and Equity
TotalLiabilitiesandEquity
FinancingDeficiency(Surplus)
2005
2 000
2,000
18,000
20,000
1,000
5,000
500
13,500
20 000
20,000
%ofSales
20%
180%
200%
10%
200%
IncomeStatement
Revenues
Revenues
CostofGoodsSold
GrossProfit
SellingandGeneralAdministrativeExpenses
g
p
OperatingIncome
InterestExpense
EBT
Taxes
NetIncome
2005
10 000
10,000
5,500
4,500
800
3,700
500
3,200
960
2,240
%
100%
55%
45%
8%
37%
5%
2006
11 000
11,000
6,050
4,950
880
4,070
500
3,570
1071
2,499
Note that Interest Expense and Taxes were not pro rated to sales! Since
We assumed no change in LT debt, interest expense remained constant!
BalanceSheetEndofYear
CurrentAssets
2005
2006(A)
2006(B)
2,000
20%
2,200
2,200
NetPlantandEquipment
18,000
180%
19,800
19,800
TotalAssets
20,000
200%
22,000
22,000
CurrentLiabilities
1,000
10%
1,100
1,100
LongTermDebt
5,000
5,000
5,000
500
500
500
Retained Earnings
RetainedEarnings
13 500
13,500
15 999
15,999
14 750
14,750
TotalLiabilitiesandEquity
20,000
22,599
21,350
(599)
650.5
CommonStock&PaidinCapital
FinancingDeficiency(Surplus)
Under the assumption that no dividends are paid, there is a financing surplus.
We could reconcile this assuming capital expenditures, dividend payments or
Stock repurchases.