Chap003 and Ch004 - OCT 10TH LECTURE

Chap003 and Ch004 - OCT 10TH LECTURE - 3.3 The Du Pont...

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Unformatted text preview: 3.3 The Du Pont Identity b ROE = NI / TE b Multiply by 1 and then rearrange: s ROE = (NI / TE) (TA / TA) 3-0 s ROE = (NI / TA) (TA / TE) = ROA * EM b Multiply by 1 again and then rearrange: s ROE = (NI / TA) (TA / TE) (Sales / Sales) s ROE = (NI / Sales) (Sales / TA) (TA / TE) s ROE = PM * TAT * EM Using the Du Pont Identity b ROE = PM * TAT * EM s Profit margin is a measure of the firm s operating efficiency how well it controls costs. 3-1 s Total asset turnover is a measure of the firm s asset use efficiency how well it manages its assets. s Equity multiplier is a measure of the firm s financial leverage. Potential Problems b There is no underlying theory, so there is no way to know which ratios are most relevant. b Benchmarking is difficult for diversified firms. 3-2 b Globalization and international competition makes comparison more difficult because of differences in accounting regulations. Japanese P/E ratios! b Firms use varying accounting procedures. b Firms have different fiscal years. b Extraordinary, or one-time, events Manufacturing versus Services 3-3 3.4 Financial Models b Investment in new assets determined by capital budgeting decisions b Degree of financial leverage determined by 3-4 capital structure decisions b Cash paid to shareholders determined by dividend policy decisions b Liquidity requirements determined by net working capital decisions Financial Planning Ingredients b Sales Forecast many cash flows depend directly on the level of sales (often estimate sales growth rate) b Pro Forma Statements setting up the plan as projected (pro forma) financial statements allows for consistency and ease of terpretation 3-5 interpretation b Asset Requirements the additional assets that will be required to meet sales projections b Financial Requirements the amount of financing needed to...
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This note was uploaded on 12/05/2011 for the course ENGINEERIN 111 taught by Professor Melihabulu-taciroglu during the Fall '11 term at UCLA.

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Chap003 and Ch004 - OCT 10TH LECTURE - 3.3 The Du Pont...

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