The DuPont formula defines the net return on shareholders’ equity as a function of the following components:

Operating margin Asset turnover

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www.mhhe.com/bkm 14 Financial Statement Analysis 469 TA B L E 1 4 . 1 9 Mastertoy, Inc.:

Actual 2008 and estimated 2009 financial statements for fiscal year ending December 31

($ millions, except per-share data)

2008 2009 Income Statement Revenue $4,750 $5,140 Cost of goods sold 2,400 2,540 Selling, general, and administrative 1,400 1,550 Depreciation 180 210 Goodwill amortization 10 10 Operating income $ 760 $ 830 Interest expense 20 25 Income before taxes $ 740 $ 805 Income taxes 265 295 Net income $ 475 $ 510 Earnings per share $ 1.79 $ 1.96 Average shares outstanding (millions) 265 260 Balance Sheet Cash $ 400 $ 400 Accounts receivable 680 700 Inventories 570 600 Net property, plant, and equipment 800 870 Intangibles 500 530 Total assets $2,950 $3,100 Current liabilities $ 550 $ 600 Long-term debt 300 300 Total liabilities $ 850 $ 900 Stockholders’ equity 2,100 2,200 Total liabilities and equity $2,950 $3,100 Book value per share $ 7.92 $ 8.46 Annual dividend per share 0.55 0.60 TA B L E 1 4 . 2 0 Income statements and balance sheets 2006 2009 Income statement data Revenues $542 $979 Operating income 38 76 Depreciation and amortization 3 9 Interest expense 3 0 Pretax income 32 67 Income taxes 13 37 Net income after tax $ 19 $ 30 Balance sheet data Fixed assets $ 41 $ 70 Total assets 245 291 Working capital 123 157 Total debt 16 0 Total shareholders’ equity $159 $220 www.mhhe.com/bkm 470 Part FOUR Security Analysis Interest burden Financial leverage Income tax rate Using only the data in Table 14.20:

a. Calculate each of the fi ve components listed above for 2006 and 2009, and calculate the return on equity (ROE) for 2006 and 2009, using all of the fi ve components.

b. Briefl y discuss the impact of the changes in asset turnover and fi nancial leverage on the change in ROE from 2006 to 2009. LO.1