5 part dupont ROE question question, following, describes, delicious, investment

parott

Practice Exam Vol 2 Exam 2, Morning
Question 26
Using the Data found in Exhibit 1 and the extended dupont equation, which of the following best describes the impact on delicious's return on equity for 2009 of eliminating the investment in the us associate.

A . Adjusted ROE is lower than unadjusted ROE
B. Adjusted ROe is higher than unadjusted ROE
C. The investment in the US associate has no impact on adjusted ROE for 2009

The answer is B and the answer indicates that Financial Leverage will not be changed when taking out the investment in in the us associate. I do not understand why that is since the average assets in total asset turnover are adjusted. I would think that if average assets are adjusted there they should also be adjusted in financial leverage.

yodacaia

dont have a single thing in front of me to help there but:


= (NI/EBT)*(EBIT/EBT)*(EBIT/SALES)*(ASSETS/EQUITY)*(SALES/ASSETS)

*so depending upon the consolidation method:
1) Equity Method - remove a noncurrent asset = might not change based on the last 2 items
2) Prop Consol - remove each line item and see
3) Consolidation - def change but consider the minorty interest..

will look when i get home

hassan

second portion of Northeast should be EBT/EBIT not EBIT/EBT

SFoyil

This was exactly what I was gonna ask regarding this question.
For those without the book handy.
Practice Exam Vol 2 Exam 2, Morning
Question 26
Using the Data found in Exhibit 1 and the extended dupont equation, which of the following best describes the impact on delicious's return on equity for 2009 of eliminating the investment in the us associate.

GIVEN: 2009 2008
Revenue 60,229 55,137
EBIT 7,990 7,077
EBT 7,570 6,779

Income
from
Associate 354 270
NI 6,501 5,625


Balance Sheet
Total Asset 56,396 53,111

Investment 5,504 5,193
from
Associate
Equity 30,371 29,595


Now the answer is adjusted ROE greater than unadjusted ROE. The answer uses the 5 part dupont model. NI/EBT x EBT/EBIT x EBIT/REV x REV/Avg Total Asset x Avg Total Asset/Equity.

NI/EBT: adjusted will be lower than unadjusted NI/EBT (b/c your taking out the income from associate, so lower NI)
Rev/Avg Total Asset: Adjusted is higher than unadjusted (b/c lower avg total asset due to taking out the investment in associate).

The higher adjusted asset turnover is greater than the decrease in the adjusted NI/EBT. And therefore adjusted ROE is higher than unadjusted ROE. But this is b/c they say that financial leverage is unchanged as the it doesn't give any info on how the investment is financed. However, doesn't total avg asset decrease in the adjusted financial leverage hence lower adjusted financial leverage?

The problem doesn't if they had controlling interest so assuming it is equity investment (30%)

Another question, is the denominator for the asset turnover -> Average total asset? and for financial leverage -> average equity? Or if on test we see statements for 2+ years, we would avg them?