True or False: An increase in the equity multiplier is always good for shareholders. True False Net Incen While investors are extremely interested in the return on equity (ROE), which is calculated as shareholder equiry looking at this figure does not tell the whole story. Instead, many investors and analysts look to the DuPont equation to study the components of ROE. The Dupont equation can be stated as: ROE=ROA Equity multiplier Where ROA is the return on total assets. However, given that ROA can be written as the product of profit margin and total assets turnover, the DuPont equation also implies that ROE can be stated as: ROE = Profit margin x Total assets turnover x Equity multiplier The profit margin indicates the income earned on company sales. Since this ratio is strongly influenced by costs and the price of sales, keeping costs in check while keeping prices at a premium will increase profit margin and increase ROE (all else equal). Total assets turnover indicates how many times a company's assets were "turned over" in a given period of time (typically a year). Thus, this ratio represents the number of times the profit margin is earned. The equity multiplier adjusts the return on assets the product of profit margin and total assets turnover) upward to reflect the fact that interest had been paid to bondholders before net income to stockholders was calculated. The ROE obtained by using the Dupont is the same as what would be obtained by the traditional method of dividing net income by shareholder equity. However, by breaking down ROE in this way using the DuPont equation, investors and analysts can gain further insights into the key drivers of ROE. Use the previous passage of text to answer the question that follows. Suppose a firm sees an decrease in the number of times its assets are turned over in a year. This would represent a total assets turnover, resulting in a return on equity, all else equal. higher Grade Step 1 TOTAL SCORE: 0/6 lower to compite this sic and unlock the next sic) Suppose that Rayval Inc has the following data: 1.5 36.5 days 5 Total assets turnover Days sales outstanding Inventory turnover ratio Fixed assets turnover Current ratio Gross profit margin on sales: 4 2 30.00% Also suppose that Royval Inc has the following balance sheet: Balance Sheet Assets Liabilities Cash Current Liabilities Accounts receivable Long-term debt $135,000 Inventories Common stock Fixed assets $130,000 Total assets $500,000 Retained earnings Total Liabilities and equity Cost of goods sold Sales Given the value of total assets turnover, along with the level According to the video, total assets turnover is equal to of total assets given, this means that Royval's sales must be Given the value of DSO, along According to the video, DSO (days sales outstanding) can be written as with the level of sales you already calculated, this means that Royval's recevables must be Given the value of the inventory ratio, along with According to the video, the inventory ratio can be written as equal to the level of sales you already calculated, this means that Royval's inventories must be According to the video, the fixed asset turnover ratio can be written as This means that Royval has fixed assets of According to the video, cash can be written as total assets minus fixed assets, inventories, and accounts receivable. This yields a value of cash of for Royval. According to the video, the current ratio can be written as and the value of the current ratio yields a value of current liabilities of approximately Plugging in the value for current assets According to the video, the value of total assets is equal to the value of total liabilities and equity. Given In the video, total liabilities and equity is equal to the level of total liabilities and equity, as well as retained earnings, current liabilities and the level of long-term debt, solving for Royval's common stock yields Given the gross profit margin and the level According to the video, gross profit margin can be written as of sales you have already calculated, this means that Royval has a cost of goods sold of