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COM-405: Business Finance Overview

This document provides information about the COM-405 Introduction to Business Finance course including the course code, title, credit hours, teacher name and contact information, class time, and topics to be covered which include ratio analysis, time value of money, sources of financing, and standardized financial statements. It also explains the DuPont identity formula for calculating return on equity and provides an example calculation for two years.

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Sajjad Ahmad
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93 views12 pages

COM-405: Business Finance Overview

This document provides information about the COM-405 Introduction to Business Finance course including the course code, title, credit hours, teacher name and contact information, class time, and topics to be covered which include ratio analysis, time value of money, sources of financing, and standardized financial statements. It also explains the DuPont identity formula for calculating return on equity and provides an example calculation for two years.

Uploaded by

Sajjad Ahmad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd

Course Code : COM-405

Course Title : INTRODUCTION TO BUSINESS FINANCE


Credit Hours : 3(3-0)
 Teacher Name : Moeez Ul Haq
 Class : Lecture Room (Thu)
 Class Time : 08:00 Am To 10:30 Am
 Email address : [email protected]
 Link for Notes :
https://drive.google.com/drive/folders/1yt22B8epsWPJI
xWPvT4CzIghCJWuprIz?usp=sharing
Ratio Analysis
The Time Value of Money ( NPV )
Share and its types
Sources of Short-Term Financing
Working Capital Management Cash Flow
planning
Standardized financial statements
Understanding Balance Sheets
Du Point Identity
Du Point Identity

 TheDuPont identity is an expression that shows a


company's return on equity (ROE) can be
represented as a product of three other ratios:
the profit margin, the total asset turnover, and
the equity multiplier.
Understanding the DuPont Identity

1. Operating efficiency, which is measured by


profit margin

2. Asset use efficiency, which is measured by


total asset turnover

3. Financial leverage, which is measured by the


equity multiplier.
DuPont Identity

ROE = Profit margin x asset turnover x equity multiplier

 This formula, in turn, can be broken down further to:

ROE = (net income / sales) x (revenue / total assets) x


(total assets / shareholder equity)
Calculation

Year one net income = $180,000


Year one revenues or sales = $300,000
Year one total assets = $500,000
Year one shareholder equity = $900,000
Calculation

Year one net income = $180,000


Year one revenues or sales = $300,000
Year one total assets = $500,000
Year one shareholder equity = $900,000

ROE year one = ($180,000 / $300,000) x


($300,000 / $500,000) x ($500,000 / $900,000)
= 20%
Calculation

Year two net income = $170,000


Year two revenues or Sales = $327,000
Year two total assets = $545,000
Year two shareholder equity = $980,000
Calculation
Year two net income = $170,000
Year two revenues or Sales = $327,000
Year two total assets = $545,000
Year two shareholder equity = $980,000

ROE year two = ($170,000 / $327,000) x


($327,000 / $545,000) x ($545,000 / $980,000)
= 17%
Du Point

ROE = Profit margin x asset turnover x equity multiplier


1. ROE year one = 60% x 60% x 56% =
20%
2. ROE year two = 52% x 60% x 56% =
17%
Du Point
ROE = Profit margin x asset turnover x equity multiplier
1. ROE year one = 60% x 60% x 56% = 20%
2. ROE year two = 52% x 60% x 56% = 17%
You can clearly see that the ROE declined in
year two. During the year, net income,
revenues, total assets, and shareholder equity all
changed in value. By using the DuPont identity,
analysts or managers can break down the cause
of this decline. 
Question Answer session

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