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stated.
Question 5.
5.
(TCO G) If net income, total assets, and book value of equity stayed the same,
what would be the effect on the DuPont Identity of an increase in sales? (Points : 20)
answer
DuPont is just the extension of the formula of ROE(return on Equity). In normal terms ROE is
calculated as follows:
ROE = Net Income / Equity
In DuPont Analysis we have ROE = (Net Income / Sales) x (Sales / Assets) x (Assets / Equity).
If we cut Sales with Sales and Assets with Assets we have left with the same formula, i.e., ROE
= Net Income / Equity.
DuPont is not giving any new formula; it is just dividing the formula for analysis of ROE that
if ROE is low where is the drawback in the 3 components.
Thus, we can say that increase in sales will not affect the ROE in any way, given the net
income, total assets, and book value of equity stayed the same. The financial result will be
same. DuPont Identity will only be help in better decision making not improving any financial
results.
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