Du Pont Disaggregation of ROE PDF

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For this course, you will have lectures that will help you on your midterm, final, and projects, I got an A for this course so hope this helps...

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DuPont Disaggregation of ROE

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ROE reflects both § Company performance (as measured by ROA) § How assets are financed (as measured by Financial Leverage) ROE is higher when there is more debt and less equity for a given level of assets Tradeoff: greater debt means higher risk for the company

Return on Assets

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Return on assets (ROA) measures return from the perspective of the entire company (enterprise level) This return includes both profitability (numerator) and total company assets (denominator) To earn a high ROA, the company must be profitable and manage assets (hold the lowest level of assets possible to achieve the desired profit) ROA analysis encourages managers to focus on both the income statement and the balance sheet

Return on Assets at Boston Scientific

Median ROA for S&P 500 firms

§ 6.1% in 2018 Ranged from 5.2% to 6.1% from 2014 – 2018 Financial Leverage

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Financial leverage measures the relative use of debt versus equity to finance the company’s assets Financial leverage is important because debt is a contractual obligation and a company’s failure to repay principal or interest can result in legal repercussions or even bankruptcy Higher financial leverage means higher debt and interest payments All else equal, higher financial leverage increases the probability of default and possible bankruptcy

Financial Leverage at Boston Scientific Median FL for S&P 500 firms § 2.66 in 2018 § Ranged from 2.46 to 2.74 from 2014 - 2018...