Give the DuPont model formula for computing (a) rate of return on total assets (ROA) and (b) rate of return on common stockholders' equity (ROE). Then answer these questions about the rate-of-return computations. 1. Explain the meaning of the component driver ratios in the computation of ROA. 2. What impact does the leverage ratio have on ROA? 3. Under what circumstances will ROE be higher than ROA? Under what circumstances would ROE be lower than ROA? Begin by selecting the DuPont model formula for computing the rate of return on total assets (ROA). ROA Now select the DuPont model formula for computing the rate of return on common stockholders' equity (ROE). ROE 1. Explain the meaning of the component driver ratios in the computation of ROA. Select the component driver ratios in the computation of ROA, the formula for each component driver ratio and what each ratio measures. (Abbreviations used: Ave. = average.) Ratio Formula Measure of *minus preferred dividends, if any 2. What impact does the leverage ratio have on ROA? When multiplied by ROA, leverage magnifies the return to make The leverage ratio measures ROE 3. Under what circumstances will ROE be higher than ROA? Under what circumstances would ROE be lower than ROA? If ROA is negative, and the leverage ratio exceeds one, the If ROA is positive, and the leverage ratio exceeds one, the leverage makes ROE leverage makes ROE Give the DuPont model formula for computing (a) rate of return on total assets (ROA) and (b) rate of return on common stockholders' equity (ROE). Then answer these questions about the rate-of-return computations. 1. Explain the meaning of the component driver ratios in the computation of ROA. 2. What impact does the leverage ratio have on ROA? 3. Under what circumstances will ROE be higher than ROA? Under what circumstances would ROE be lower than ROA? Begin by selecting the DuPont model formula for computing the rate of return on total assets (ROA). ROA Now select the DuPont model formula for computing the rate of return on common stockholders' equity (ROE). ROE 1. Explain the meaning of the component driver ratios in the computation of ROA. Select the component driver ratios in the computation of ROA, the formula for each component driver ratio and what each ratio measures. (Abbreviations used: Ave. = average.) Ratio Formula Measure of *minus preferred dividends, if any 2. What impact does the leverage ratio have on ROA? When multiplied by ROA, leverage magnifies the return to make The leverage ratio measures ROE 3. Under what circumstances will ROE be higher than ROA? Under what circumstances would ROE be lower than ROA? If ROA is negative, and the leverage ratio exceeds one, the If ROA is positive, and the leverage ratio exceeds one, the leverage makes ROE leverage makes ROE
