Question 2.8: The following table contains information about Walmart (WMT)...
The following table contains information about Walmart (WMT) and Nordstrom (JWN). Compute their respective ROEs and then determine how much Walmart would need to increase its profit margin in order to match Nordstrom’s ROE.
| Profit Margin | Asset Turnover | Equity Multiplier | |
| Walmart | 3.60% | 2.3 | 2.7 |
| Nordstrom | 6.10% | 1.5 | 4.2 |
Plan and Organize
The table contains all the relevant information to use the DuPont Identity to compute the ROE. We can compute the ROE of each company by multiplying together its profit margin, asset turnover, and equity multiplier. In order to determine how much Walmart would need to increase its profit margin to match Nordstrom’s ROE, we can set Walmart’s ROE equal to Nordstrom’s, keep its turnover and equity multiplier fixed, and solve for the profit margin.
Execute
Using the DuPont Identity, we have:
ROE_{WMT}=3.6\%\times 2.3\times 2.7=22.4\%ROE_{JWN}=6.1\%\times 1.5\times 4.2=38.4\%
Now, using Nordstrom’s ROE, but Walmart’s asset turnover and equity multiplier, we can solve for the profit margin that Walmart needs to achieve Nordstrom’s ROE:
38.4\%= Margin\times 2.3\times 2.7Margin=38.4\%/6.21=6.2\%
Evaluate
Walmart would have to increase its profit margin from 3.6% to 6.2% in order to match Nordstrom’s ROE. It would be able to achieve Nordstrom’s ROE with much lower leverage and around the same profit margin as Nordstrom (6.2% vs. 6.1%) because of its higher turnover.