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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

A company's ROE is computed by DuPont analysis. Net profit margin is 6%, total asset turnover is 2.5 times, and the equity multiplier (assets/equity) is 2. If the firm reduces its equity multiplier to 1.6 and asset turnover improves to 3.0 times with margin unchanged, what is the new ROE?

The new ROE is 28.8%. Under DuPont analysis, ROE equals net margin times asset turnover times equity multiplier, so 6% x 3.0 x 1.6 gives 28.8%, slightly below the earlier 30%.

  1. A28.8%Correct
  2. B30.0%
  3. C24.0%
  4. D32.4%

Explanation

New ROE = 6% x 3.0 x 1.6 = 28.8%. Old ROE was 6% x 2.5 x 2 = 30%. Option 2 is the old ROE, ignoring the changes.

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