Question 14

The DuPont Identity holds that ROE = PM x T/A T/O x EM. However, after doing some quick algebra, ROE still equals net income divided by owners equity. What does the DuPont Identity accomplish with its expansion of the ROE into profit margin, total asset turnover and equity multiplier components?

The identity allows expanding the ROE into the aftertax income.

The identity uses the ROE in describing such things as the costs of Obamacare.

The identity can reveal the impact of new borrowing on employee morale.

The identity separates the ROE into operating, capital budgeting and capital structure components.

The identity is used by bankers in meeting capital requirements under the Dodd Frank Act.

Question 15

A firms current market value of equity is $20 million. It has one million shares outstanding. The firms equity multiplier is one, and it had sales of $50 million last year. Its profit margin was 5%. What is the firms implied price-earnings ratio?

40

5

16

20

8

Question 16

If you deposit $2,000 into an account at the end of each of the next 40 years, at 4.5% interest, how much will you have in the account, to the nearest $1,000, in 40 years?

$184,000

$214,000

$63,000

$122,000

$196,000

Question 17

Your company had net sales of $100,000 over the past year. Half the sales were credit sales. During that time, average receivables were $5,000. What was the average collection period? (Assume a 360-day year)

18 days

27 days

36 days

72 days

60 days