calculate the roe for 1999 using the three components of the dupont formula 543648 | Homework Solutions

(Adapted from 1999 CFA Level I1 exam) Scott Kelly is reviewing MasterToy”s financial statements in order to estimate its sustainable growth rate. Using the information presented in Exhibit 18- 1,

A. i. Identify the three components of the DuPont formula.

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ii. Calculate the ROE for 1999 using the three components of the DuPont formula.

iii. Calculate the sustainable growth rate for 1999

Kelly has calculated actual and sustainable growth for each of the past four years and finds in each year that its calculated sustainable growth rate substantially exceeds its actual growth rate.

B. Cite one course of action (other than ignoring the problem) Kelly should encourage Master Toy to take, assuming the calculated sustainable growth rate continues to exceed the actual growth rate.

EXHIBIT 18-1 Master Toy Inc. Actual 1998 and Estimated 1999 Financial Statements For N Ending December 31 ($ millions, except per-share data)
	1998	1999e	Change (%)
Income Statement
Revenue	$4,750	$5,140	8.2
Cost of goods sold	$2,400	$2,540
Selling, general, and administrative	1,400	1,550
Depreciation	180	210
Goodwill amortization	10	10
Operating income	$760	$830	9.2
Interest expense	20	25
Income before taxes	$740	$805
Income taxes	265	295
Net income	$475	$510
Earnings per share	$1.79	$1.96	9.5
Average shares outstanding (millions)	265	260
Balance Sheet
Cash	$400	$400
Accounts receivable	680	700
Inventories	570	600
Net property, plant, and equipment	800	870
Intangibles	500	530
Total assets	$2,950	$3,100
Current liabilities	$550	$600
Long-term debt	300	300
Total liabilities	$850	$900
Stockholders” equity	2100	2.200
Total liabilities and equity	$2,950	$3,100
Book value per share	$7.92	$8.46
Annual dividend per share	$0.55	$0.60

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