Corporate decision makers and analysts often use a particular technique, called a DuPont analysis, to better understand the factors that drive a company’s financial performance, as reflected by its return on equity (ROE). By using the DuPont equation, which disaggregates the ROE into three components, analysts can see why a company’s ROE may have changed for better or worse and identify particular company strengths and weaknesses. The DuPont Equation A) A DuPont analysis is conducted using the DuPont equation, which helps to identify and analyze three important factors that drive a company’s ROE. According to the equation, which of the following factors directly affect a company’s ROE? Check all that apply. Equity multiplier   Share price   Profit margin     Most investors and analysts in the financial community pay particular attention to a company’s ROE. The ROE can be calculated simply by dividing a firm’s net income by the firm’s shareholder’s equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to develop a clearer picture of what is happening within a company. An analyst gathered the following data and calculated the various terms of the DuPont equation for three companies:   ROE = Profit Margin x Total Assets Turnover x Equity Multiplier Company A 12.0%   57.3%   9.8   2.14 Company B 15.5%   58.2%   10.2   2.61 Company C 21.5%   58.0%   10.3   3.60   B) Referring to these data, which of the following conclusions will be true about the companies’ ROEs? The main driver of Company C’s superior ROE, as compared with that of Company A’s and Company B’s ROE, is its greater use of debt financing.   The main driver of Company C’s superior ROE, as compared with that of Company A’s and Company B’s ROE, is its operational efficiency.   The main driver of Company A’s inferior ROE, as compared with that of Company C’s ROE, is its higher total asset turnover ratio.

Assuming that the fiscal health of the Health Company is not optimal, explain how Return on Equity (ROE) can help justify paying dividends to shareholders and increasing the company's debts. If Liver Corporation has a lower price/earnings (P/E) ratio than another firm engaged in the same business, what reasons might explain these differences? Describe at least three problems encountered in the analysis of financial indicators. Explain how the DuPont equation can help in analyzing company results.

Compare and contrast horizontal and vertical analysis? Describe how to evaluate an entity’s liquidity using financial ratios? Describe how to evaluate an entity’s solvency using financial ratios? Describe managerial accounting, including its differences with financial accounting, its place in the organization, and its uses?

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