Question

An advantage of the DuPont model for calculating ROI is that?

1) It focuses on asset utilization as well as net income.
2) It is easier to use than the straightforward ROI formula.
3) It uses average assets and the straightforward ROI formula does not.
4) It uses stockholders' equity.

Answer 1

Answer: The advantage of the DuPont model for calculating ROI is that it focuses on asset utilization as well as net income.

The DuPont model breaks down the return on investment (ROI) calculation into three components: profit margin, asset turnover, and financial leverage. This model allows for a more comprehensive analysis of the factors that contribute to ROI.

1) It focuses on asset utilization as well as net income: Unlike the straightforward ROI formula, which only considers net income, the DuPont model takes into account how efficiently a company utilizes its assets. By including asset turnover in the calculation, the DuPont model provides insights into the company's ability to generate revenue from its assets.

2) It is easier to use than the straightforward ROI formula: This statement is not accurate. The DuPont model may involve additional calculations compared to the straightforward ROI formula. However, the DuPont model provides a more detailed and holistic view of ROI, making it valuable for analyzing a company's performance.

3) It uses average assets, and the straightforward ROI formula does not: This statement is accurate. The DuPont model uses average assets in its calculation, which provides a more accurate representation of asset utilization over a specific period. In contrast, the straightforward ROI formula uses total assets, which may not reflect changes in asset levels throughout the period.

4) It uses stockholders' equity: This statement is not accurate. The DuPont model does not explicitly include stockholders' equity in its calculation. However, it indirectly considers financial leverage, which relates to a company's capital structure and the use of debt. This aspect is part of the DuPont model's analysis of ROI, but it is not the same as using stockholders' equity directly.

In summary, the advantage of the DuPont model for calculating ROI is that it considers asset utilization in addition to net income, providing a more comprehensive analysis of a company's performance.

Step-by-step explanation:

Answer 2

The DuPont model for calculating ROI is advantageous because it considers asset utilization alongside net income, providing a more in-depth analysis of a company's operational efficiency and profitability. Option 1 is the correct answer.

Step-by-step explanation:

Advantages of the DuPont Model for Calculating ROI

The DuPont model of calculating Return on Investment (ROI) offers several advantages over the straightforward ROI calculation. One benefit is that it focuses on asset utilization in addition to net income. This means the DuPont model analyzes both the efficiency of using assets to generate sales and the profitability from those sales, providing a more comprehensive assessment. Another key advantage is that the DuPont formula segments ROI into multiple components. This breakdown can reveal insights into which parts of a business are contributing more or less to its overall return. By examining profit margins, asset turnover, and financial leverage separately, companies can pinpoint specific areas for improvement. The standard ROI calculation does not offer this level of detail.

Option 1, "It focuses on asset utilization as well as net income," is therefore the correct choice from the provided options. The DuPont model does not, inherently, rely on the use of average assets or stockholders' equity, as some of the other options may imply.