Problem 2 - Use of Ratios to Make Other Calculations You have a company that cur

Question

Problem 2 - Use of Ratios to Make Other Calculations You have a company that currently has a market capitalization of $4.6 billion It has a market to book ratio of 3 and a book debt to equity ratio of 6. If cash is $1.1 billion, what is the company's enterprise value?

Solution:

Discussion of the Dupont Formula

The Dupont Formula is a way of disaggregating the components of ROE

ROE = Net Margin X Asset Turnover X Equity Multiplier

We know by definition, ROE = Net Income / Book Equity

Dupont shows us:

ROE =

Net Income /

Times

Sales/

Times

Assets/

Sales

Assets

Equity

We also know by definition, ROA = Net Income / Assets

Dupont shows us:

ROA =

Net Income/

Times

Sales/

Sales

Assets

ROE =

Net Income /

Times

Sales/

Times

Assets/

Sales

Assets

Equity

Explanation / Answer

Answer 1 i Market capitalization 4.6 Billion ii Market to book ratio 3 iii Debt to equity ratio 6 iv Cash 1.1 Billion v=i/ii book value of equity =          1.53 Billion vi=v*iii value of debt =          9.20 Billion viii=i+vi-iv enterprise value =       12.70 Billion Answer 2 DuPont Formula : DuPont break the formula for ROE and ROA as below- Return on equity = Net income/Total equity = (Net income/total sales)*(Total sales/Total asset)*(total asset/Total equity) = Net margin*Asset turn over * equity multiplier = Return on Asset * equity multiplier Return on Asset = Net income/Asset = (Net income/total sales)*(total sales/total asset) = Net margin*Asset turnover = ROE/Equity multiplier

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