CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future
A company's net profit margin rose from 8% to 10% while its total asset turnover fell from 1.5 to 1.2 and its financial leverage was unchanged at 2.0. Based on the DuPont decomposition, the change in return on equity is closest to:
The change is about zero. ROE was 8% x 1.5 x 2.0 = 24% before and 10% x 1.2 x 2.0 = 24% after. The higher margin was fully offset by lower asset turnover, with leverage unchanged.
- A-2.4 percentage points
- B0.0 percentage pointsCorrect
- C+2.4 percentage points
Explanation
Initial ROE = 8% x 1.5 x 2.0 = 24%. New ROE = 10% x 1.2 x 2.0 = 24%. The change is zero because the margin gain is exactly offset by the turnover decline. The other options come from ignoring one of the components.
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