CFA Level I · CFA Level I Exam · Financial Analysis Techniques
A company reports net income of 90 million, revenue of 1,200 million, average total assets of 900 million and average shareholders' equity of 450 million. Using the three-step DuPont decomposition, the company's return on equity is closest to:
ROE is about 20.0%. Net margin of 7.5% times asset turnover of 1.333 times financial leverage of 2.0 gives 20%, which matches net income of 90 divided by average equity of 450. The 10% figure is ROA and ignores leverage.
- A10.0%
- B15.0%
- C20.0%Correct
Explanation
Net margin = 90/1,200 = 7.5%. Asset turnover = 1,200/900 = 1.3333. Leverage = 900/450 = 2.0. ROE = 7.5% x 1.3333 x 2.0 = 20.0%. Check: 90/450 = 20%. The 10.0% figure is ROA (90/900), which omits leverage.
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