Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages Description/Paper Instructions
ACCT 510 – DuPont Analysis
Overview
In this assignment, you will be performing DuPont Analysis (discussed below), which focuses on return on equity, for a chosen firm from the restaurant industry. In the accompanying dataset to this assignment, you will find financial statement information for more than 50 restaurant firms over the years 2014-2017. You will analyze this data using the DuPont Method to draw inferences regarding firm performance. Afterwards, you will write a short memo regarding your findings.
The DuPont Analysis
The DuPont analysis is a method of evaluating the performance of a company and was named after the DuPont corporation, who first utilized the method in the 1920s. The analysis starts with the ratio, return on equity (ROE):
ROE =
where average shareholders’ equity is the average of a firm’s beginning and ending shareholders’ equity in any given year. Return on equity (ROE) tells us how much return a company generates on its shareholders’ behalf. Said another way, it tells us how much net income a company generates for each dollar invested by its shareholders. While ROE is obviously an important metric for shareholders, it would be naïve to make judgments and decisions based on this metric alone, as it provides little detail as to what factors are causing changes in a company’s ROE. To provide additional insight, we can decompose ROE into smaller components using the DuPont Method. In turn, we can gain a better understanding of what is driving ROE. We can first decompose ROE into two major drivers, return on assets (ROA) and financial leverage, where:
ROA = and Financial Leverage =
Notice that if we multiply ROA by Financial Leverage, the product is mathematically equivalent to ROE. ROA indicates how much net income is generated for each dollar of total assets that the company acquires. That is, it measures how effectively and efficiently a company uses its resources to generate profit and provides an indication of operating performance. The second component of ROE in this decomposition is financial leverage, which captures the degree to which a company’s assets are financed with equity, as opposed to debt. Thus, by decomposing ROE into ROA and financial leverage, we can determine to what extent a company’s financing and/or operating activities are driving the change in ROE.
Similar to the decomposition of ROE into 2 smaller components, we can gain further insight into a company’s operating performance when we break down ROA into 2 smaller components, return on sales (ROS) and asset turnover, where:
ROS = Asset Turnover =
Again, notice that if we multiply ROS by Asset Turnover, it is mathematically equivalent to ROA. ROS is a measure of probability and represents the amount of profit a company earns on each dollar of sales. Asset turnover is a measure of efficiency. It represents the magnitude of sales that a company generates for each dollar of assets. Thus, we can see to what extent a company’s change in profitability is driven by its ability to generate sales, as opposed to the profitability of its sales. Bringing everything together, we can now see that:
ROE = Return on Sales × Asset Turnover × Financial Leverage
or
ROE = Profitability × Efficiency × Leverage
This decomposition of ROE allows us to better determine which aspects of the company’s operations are driving ROE, and thus determine the advantages and disadvantages of the company. Generally, it is not desirable for the change in ROE to be largely driven by leverage, since a firm’s operating activities are, by nature, the most important aspect of a company’s ability to generate profits. In other words, if a company cannot operate its business well over a long-term period, they will eventually go bankrupt; it does not matter how they finance their activities. [While we could further perform financial ratio analysis to further investigate factors driving the 3 above components of ROE, this assignment is only intended to introduce financial analysis].
Last, but not least, any lesson in financial statement analysis stresses the importance of comparing financial numbers to draw insights. To provide a meaningful analysis, we need to be able to benchmark a company’s performance. For example, while a company may report a ROE of 15%, it may be the case that its competitors, on average, performed very well in a particular year. Therefore, a 15% ROE may be sub-par relative to the performance of a company’s competitors. There are several approaches to determining the competitors of a company to draw comparisons. The method we will use in this assignment is to compare your chosen firm to other firms in the same industry. To make these comparisons, you will calculate the mean of each financial ratio (discussed above) for each year.
Instructions
1. In the accompanying dataset to this assignment, you will find financial data for more than 50 firms from the restaurant industry. You will need to perform a DuPont analysis on all the firms to calculate the industry average for ROE and its 3 components, with respect to the Dupont Analysis, for each year from 2015 to 2017. In other words, you may first calculate industry averages to benchmark your chosen firm’s performance against.
a. Note that you have annual data for many restaurant industry firms from 2014 to 2017. You only have data for the year of 2014 so that you may calculate average shareholders’ equity and average total assets in 2015.
2. Pick one firm from the dataset.
3. Compare your chosen firm’s performance relative to the industry.
a. Using data visualizations (e.g. charts and graphs) will help you to analyze the data and identify patterns.
4. Write a memorandum describing your analysis and findings.
a. In a tabular format, present ROE in each year and the decomposition of ROE for your chosen firm. Do the same for the industry average.
b. Discuss your findings from the DuPont analysis in a memo. Your memo should, at a minimum, discuss the following points:
· How your chosen company’s ROE (as well its components) compares to the industry average?
· What factors are driving your chosen company’s ROE? To what extent are these factors driving ROE desirable or undesirable?
· Brainstorm regarding other factors that may drive the 3 components of ROE. In other words, we could further investigate the 3 components of ROE to gain even more detailed insight on the company’s performance. No calculations are necessary for this portion of the assignment; simply discuss some general factors that may be driving the 3 components of ROE (i.e., Return on sales, Asset Turnover, Leverage).
· For example, if return on sales increases, what factors could lead to an increase in return on sales?
5. Turn in the table and memo from steps 4a and 4b, respectively, to me via e-mail. Late submissions will not be accepted.
a. Peer evaluation forms [Optional, found on Canvas]:
i. If a single member of your group wishes to fill out a peer evaluation form, each member of the group will be required to fill one out.
ii. If you wish to turn in a peer evaluation form, you may do so discretely by e-mailing it to me, along with the contact information for the members of your group. I will then contact all members in the group to fill out a peer evaluation form.
iii. If I do not receive any peer evaluation forms from your group, every member will receive the same grade. If I do receive a peer evaluation form, each student’s grade will be commensurate to the evaluation from their peers. For example, if your group receives a grade of a 100%, but a member receives an average overall peer rating of ¾, then that member will receive a grade of ¾ of 100% = 75%.
Dataset variables
· Most variables in the accompanying dataset to this assignment are self-explanatory. Some variables are not, and are explained below:
· Global Company Key (GVKEY): unique identifier given to each firm; not necessary for the analysis
· Data Date: the end of the company’s fiscal year
· Feel free to ask me about any other variables you are unsure of.
Guidelines for the memorandum
· It is important to be able to write concisely, yet effectively to convey your points. The memorandum should be:
· No more than 3-typed pages (double spaced)
· Exhibits do not count towards the page limit.
· 12-point font
· Minimum of 1” margins from all sides.
· Failure to follow these guidelines may result in point deductions. The formatting requirements above are to make sure everyone has the same amount of space with which to convey their analysis.
· It is possible to write very concisely and complete the assignment in less than a page. DO NOT unnecessarily write to fill up 3 pages.
· The use of data visualizations (e.g. charts, graphs, or tables) is highly recommended. You can attach as exhibits any computations or other analyses used in your analysis. However, simply referring to data visualizations without any discussion is unacceptable.
Additional Resources to Help Advance Your Written Assignment:
· You are strongly encouraged to utilize the writing assistance resources on campus. The Department of English offers a writing center that is available to all CSUF students. More information is available online at http://english.fullerton.edu/writing_center/ and you can schedule appointments for writing assistance at https://fullerton.mywconline.com/.
· Visit the “Tutoring Center” at the Mihaylo College of Business and Economics for writing suggestions on your work.
Location: SGMH 2404 West Pavilion
Hours: Mon – Thurs: 10:00am – 7:00pm
Phone: (657) 278-2704 Email: mcbetutoring@fullerton.edu
Webpage: http://business.fullerton.edu/StudentServices/Tutoring/default.htm
· “Effective Writing: A Handbook for Accountants”, Claire B. May and Gordon S. May, 10th ed., Publisher: Pearson (ISBN: 0-13-357949-2).
RUBRIC
QUALITY OF RESPONSE NO RESPONSE POOR / UNSATISFACTORY SATISFACTORY GOOD EXCELLENT Content (worth a maximum of 50% of the total points) Zero points: Student failed to submit the final paper. 20 points out of 50: The essay illustrates poor understanding of the relevant material by failing to address or incorrectly addressing the relevant content; failing to identify or inaccurately explaining/defining key concepts/ideas; ignoring or incorrectly explaining key points/claims and the reasoning behind them; and/or incorrectly or inappropriately using terminology; and elements of the response are lacking. 30 points out of 50: The essay illustrates a rudimentary understanding of the relevant material by mentioning but not full explaining the relevant content; identifying some of the key concepts/ideas though failing to fully or accurately explain many of them; using terminology, though sometimes inaccurately or inappropriately; and/or incorporating some key claims/points but failing to explain the reasoning behind them or doing so inaccurately. Elements of the required response may also be lacking. 40 points out of 50: The essay illustrates solid understanding of the relevant material by correctly addressing most of the relevant content; identifying and explaining most of the key concepts/ideas; using correct terminology; explaining the reasoning behind most of the key points/claims; and/or where necessary or useful, substantiating some points with accurate examples. The answer is complete. 50 points: The essay illustrates exemplary understanding of the relevant material by thoroughly and correctly addressing the relevant content; identifying and explaining all of the key concepts/ideas; using correct terminology explaining the reasoning behind key points/claims and substantiating, as necessary/useful, points with several accurate and illuminating examples. No aspects of the required answer are missing. Use of Sources (worth a maximum of 20% of the total points). Zero points: Student failed to include citations and/or references. Or the student failed to submit a final paper. 5 out 20 points: Sources are seldom cited to support statements and/or format of citations are not recognizable as APA 6th Edition format. There are major errors in the formation of the references and citations. And/or there is a major reliance on highly questionable. The Student fails to provide an adequate synthesis of research collected for the paper. 10 out 20 points: References to scholarly sources are occasionally given; many statements seem unsubstantiated. Frequent errors in APA 6th Edition format, leaving the reader confused about the source of the information. There are significant errors of the formation in the references and citations. And/or there is a significant use of highly questionable sources. 15 out 20 points: Credible Scholarly sources are used effectively support claims and are, for the most part, clear and fairly represented. APA 6th Edition is used with only a few minor errors. There are minor errors in reference and/or citations. And/or there is some use of questionable sources. 20 points: Credible scholarly sources are used to give compelling evidence to support claims and are clearly and fairly represented. APA 6th Edition format is used accurately and consistently. The student uses above the maximum required references in the development of the assignment. Grammar (worth maximum of 20% of total points) Zero points: Student failed to submit the final paper. 5 points out of 20: The paper does not communicate ideas/points clearly due to inappropriate use of terminology and vague language; thoughts and sentences are disjointed or incomprehensible; organization lacking; and/or numerous grammatical, spelling/punctuation errors 10 points out 20: The paper is often unclear and difficult to follow due to some inappropriate terminology and/or vague language; ideas may be fragmented, wandering and/or repetitive; poor organization; and/or some grammatical, spelling, punctuation errors 15 points out of 20: The paper is mostly clear as a result of appropriate use of terminology and minimal vagueness; no tangents and no repetition; fairly good organization; almost perfect grammar, spelling, punctuation, and word usage. 20 points: The paper is clear, concise, and a pleasure to read as a result of appropriate and precise use of terminology; total coherence of thoughts and presentation and logical organization; and the essay is error free. Structure of the Paper (worth 10% of total points) Zero points: Student failed to submit the final paper. 3 points out of 10: Student needs to develop better formatting skills. The paper omits significant structural elements required for and APA 6th edition paper. Formatting of the paper has major flaws. The paper does not conform to APA 6th edition requirements whatsoever. 5 points out of 10: Appearance of final paper demonstrates the student’s limited ability to format the paper. There are significant errors in formatting and/or the total omission of major components of an APA 6th edition paper. They can include the omission of the cover page, abstract, and page numbers. Additionally the page has major formatting issues with spacing or paragraph formation. Font size might not conform to size requirements. The student also significantly writes too large or too short of and paper 7 points out of 10: Research paper presents an above-average use of formatting skills. 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