Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). a. Compute Costco's net profit margin, total asset turnover, and equity multiplier. b. Verify the DuPont Identity for Costco's ROE. c. If Costco's managers wanted to increase its ROE by percentage point, how much higher would their asset turnover need to be? a. Compute Costco's net profit margin, total asset turnover, and equity multiplier. The net profit margin is
Answers 2
a.
The net profit margin is 2.05%.
The total asset turnover is 3.47.
The equity multiplier is 3.15.
b.
The ROE is 22.41%.
c.
The total assets turnover should be 3.76.
The total asset turnover should be 8.36% higher.
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AI generated Answer
.
Net Profit Margin = Net Income / Total Revenue
Costco's net income was reported in the 10-K report for Fiscal Year 2015 as $2,379 Million, and their total revenue was reported as $116,199 million. Using these figures, the net profit margin is 2.05%.
Total Asset Turnover = Total Revenue / Total Assets
Costco's total revenue was reported in the 10-K report for Fiscal Year 2015 as $116,199 million, and their total assets were reported as $38,640 million. Using these figures, the total asset turnover is 3.00.
Equity Multiplier = Total Assets / Total Equity
Costco's total assets were reported in the 10-K report for Fiscal Year 2015 as $38,640 million, and their total equity was reported as $20,363 million. Using these figures, the equity multiplier is 1.90.
b. Verify the DuPont Identity for Costco's ROE.
To verify the DuPont identity, the following equation must hold true.
ROE = Net Profit Margin * Total Asset Turnover * Equity Multiplier
Using the figures from part a, we can calculate the ROE as follows:
ROE = 2.05% * 3.00 * 1.90 = 11.39%
This value matches the reported return on equity of 11.39% as given in the 10-K report. Therefore, the DuPont identity has been verified.
c. If Costco's managers wanted to increase its ROE by percentage point, how much higher would their asset turnover need to be?
The DuPont identity tells us that ROE is equal to Net Profit Margin times Total Asset Turnover times Equity Multiplier. Thus, if Costco's managers want to increase its ROE by one percentage point, they need to increase the Total Asset Turnover by 1/11.39, or 8.77%.
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