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Exam study book Accounting and Corporate Finance of (corporate finance chapters) - ISBN: 9781307609202 (CORPORATE FINANCE)
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Running Head: CAPITAL STRUCTURE THEORY 1, CAPITAL STRUCTURE THEORY 2
Capital Structure Theory
FIN- 7012: Corporate Finance # 6
June 16th, 2018
Introduction
The financial managers of a corporation aim at wealth maximization for the sake of the
shareholders. Financial managers seek to provide an answer as to whether the acquisition of
assets or other investments increase or decrease the shareholder’s equity (Myers, 1984).
Shareholders returns comprise capital gains and dividends from shares and capital gains. The
shareholders are c0ncerned with the basic financial measures such as Net Profit Margin, Returns
on Asset, and Return on Equity (Faccio & Xu, 2015). These financial measures determine the
efficiency of a corporation on operation management. These measures can be summed up as
DuPont analysis.
DuPont Analysis
DuPont analysis, in essence, is concerned with the decomposition of return on equity,
analysis of the total asset turnover, the profit margin, and the corporation’s financial leverage
(Ross, Westerfield, & Jaffe, 2013). Fundamentally, DuPont analysis decomposes the return on
the net operating assets into two multiplicative elements namely the profit margin and the asset
turnover (Faccio & Xu, 2015). Therefore, DuPont analysis uses three profitability indicators to
measure the profitability of a firm after all expenses have been deducted (Ross, Westerfield, &
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