Q: Which of the following best describes the DuPont Identity for Return on Equity (ROE)?

$$ROE = \frac{Net\ Income}{Sales} \times \frac{Sales}{Total\ Assets} \times \frac{Total\ Assets}{Total\ Equity}$$

Q: A company has Net Income of $$1,200, Sales of 5$$,000, Total Assets of $$9,500, and Total Equity of 4$$,100. What is its Return on Equity (ROE) using the DuPont Identity?

$$ROE = \frac{1,200}{5,000} \times \frac{5,000}{9,500} \times \frac{9,500}{4,100} = 0.24 \times 0.5263 \times 2.3171 = 0.292 or$$ $$29.2\%$$

Q: A firm has the following data for 2023: Sales = $$5,000, Costs = 3$$,000, Taxes = $$800, Net Income = 1$$,200, Dividend Payout Ratio = 50\%. If sales are expected to grow by 10\% in 2024, what is the projected Net Income for 2024 using the percent of sales method?

$$Net\ Income = 1,200 \times 1.10 = 1,320$$

Q: Given: Net Income = $$1,320, Beginning Assets = 9$$,500, Dividend Payout Ratio = 50\%. What is the internal growth rate?

$$Internal\ Growth\ Rate = \frac{1,320}{9,500} \times (1 - 0.5) = 0.069 or$$ $$6.9\%$$

Question 1

Which of the following best describes the DuPont Identity for Return on Equity (ROE)?

Accepted Answer

$$ROE = \frac{Net\ Income}{Sales} 	imes \frac{Sales}{Total\ Assets} 	imes \frac{Total\ Assets}{Total\ Equity}$$

Question 2

A company has Net Income of $$1,200, Sales of 5$$,000, Total Assets of $$9,500, and Total Equity of 4$$,100. What is its Return on Equity (ROE) using the DuPont Identity?

Accepted Answer

$$ROE = \frac{1,200}{5,000} 	imes \frac{5,000}{9,500} 	imes \frac{9,500}{4,100} = 0.24 	imes 0.5263 	imes 2.3171 = 0.292 or$$ $$29.2\%$$

Question 3

Which of the following is NOT a limitation of ratio analysis?

Accepted Answer

Ratios always provide a complete picture of a firm's financial health

Question 4

Under the percent of sales method, which of the following items is most likely to vary directly with sales?

Accepted Answer

Accounts payable

Question 5

A firm has the following data for 2023: Sales = $$5,000, Costs = 3$$,000, Taxes = $$800, Net Income = 1$$,200, Dividend Payout Ratio = 50\%. If sales are expected to grow by 10\% in 2024, what is the projected Net Income for 2024 using the percent of sales method?

Accepted Answer

$$Net\ Income = 1,200 	imes 1.10 = 1,320$$

Question 6

In the percent of sales method, which of the following is typically used as the 'plug' variable to balance the pro forma balance sheet if no dividends are paid and no external equity is raised?

Accepted Answer

Debt

Question 7

A company projects total assets of $$10,450 and total liabilities and owners' equity of 10$$,250 for next year. What is the amount of net new financing (NNF) needed?

Accepted Answer

$$NNF = 10,450 - 10,250 = 200$$

Question 8

Which of the following best describes the internal growth rate of a firm?

Accepted Answer

The maximum growth rate that can be achieved without any external financing

Question 9

Given: Net Income = $$1,320, Beginning Assets = 9$$,500, Dividend Payout Ratio = 50\%. What is the internal growth rate?

Accepted Answer

$$Internal\ Growth\ Rate = \frac{1,320}{9,500} 	imes (1 - 0.5) = 0.069 or$$ $$6.9\%$$

Question 10

Which of the following is a key assumption of the percent of sales method?

Accepted Answer

Some items, such as operating liabilities and assets, vary directly with sales, while others do not

Question 11

A firm wants to maintain its current debt/equity ratio while growing. Which growth rate should it use as a benchmark?

Accepted Answer

Sustainable growth rate

Question 12

Which of the following is NOT a component of a financial plan?

Accepted Answer

Historical dividend payout ratios of competitors

Question 13

If a firm increases its dividend payout ratio, what is the likely effect on its internal growth rate, all else equal?

Accepted Answer

The internal growth rate will decrease

Question 14

Which of the following best describes the sustainable growth rate?

Accepted Answer

The maximum growth rate that can be achieved without issuing new equity and while maintaining the current debt/equity ratio

Question 15

A company has a profit margin of 24\%, asset turnover of 0.53, and an equity multiplier of 2.32. What is its ROE using the DuPont Identity?

Accepted Answer

$$ROE = 0.24 	imes 0.53 	imes 2.32 = 0.294 or$$ $$29.4\%$$

Question 16

Which of the following is NOT a determinant of the sustainable growth rate?

Accepted Answer

Inventory turnover

Question 17

If a firm’s planned growth rate exceeds its sustainable growth rate, what must the firm do to finance this growth?

Accepted Answer

Raise new external capital or increase leverage

Question 18

Which of the following is a real-world limitation of using the percent of sales method for financial forecasting?

Accepted Answer

It assumes all items vary directly with sales, which may not be true for interest expense or dividends

Question 19

A firm’s pro forma balance sheet shows assets of $$12,000, operating liabilities of 2$$,000, long-term debt of $$3,000, equity of 5$$,000, and pro forma retained earnings of $1,500. What is the net new financing (NNF) required?

Accepted Answer

$$NNF = 12,000 - 2,000 - (3,000 + 5,000 + 1,500) = 12,000 - 2,000 - 9,500 = 500$$

Financial Accounting: Ratio Analysis, Financial Planning, and the Percent of Sales Method

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