Martin performed a Basic Dupont decomposition of both Malo Ltd's and Bueno Ltd's ROE.

He commented that Malo Ltd was able to achieve a higher ROE than Bueno Ltd mainly through its superior operating efficiency as reflected in its higher net profit margin. More impressively, Malo Ltd's higher ROE was achieved despite its lower financial leverage ratio than Bueno Ltd.

As a result, Martin concluded that Malo Ltd is a much better investment opportunity than

Bueno Ltd given that the company can earn a higher return at a lower financial risk.

Required

(ii)

Decompose Malo Ltd's and Bueno Ltd's ROE using the Basic Dupont Model. Verify Martin's claim that Malo Ltd has a higher ROE, a higher net profit margin, and a lower financial leverage compared to Bueno Ltd. For simplicity, you may use the year-end figures (instead of averages) for all balance sheet items for all ratios.

(10 marks)

(iii) Prepare a common size income statement for both Malo Ltd and Bueno Ltd. Do you agree with Martin that Malo Ltd achieved better operating efficiency than Bueno Ltd?

(12 marks)

(iv) What is the main limitation of the Basic Dupont ROE decomposition as illustrated by your observation in part iii