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CFA Level I · CFA Level I Exam · Financial Analysis Techniques

A company reports the following: net income 90, sales 1,200, average total assets 800, and average shareholders' equity 400. Using a three-part DuPont decomposition, the company's return on equity is closest to:

ROE is 22.5%. The DuPont decomposition multiplies net margin of 7.5% by asset turnover of 1.5 and financial leverage of 2.0. This equals net income of 90 divided by average equity of 400. Stopping before leverage yields ROA of 11.3%, which is incorrect.

  1. A7.5%
  2. B11.3%
  3. C22.5%Correct

Explanation

Net margin = 90/1,200 = 7.5%. Asset turnover = 1,200/800 = 1.5. Leverage = 800/400 = 2.0. ROE = 7.5% x 1.5 x 2.0 = 22.5%, matching 90/400. Omitting leverage gives ROA of 11.3%; 7.5% is just the net margin.

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