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CMA Final · Strategic Performance Management and Business Valuation · Economic Efficiency of the Firm - Performance Analysis

A firm has equity of Rs 40 lakh, total assets of Rs 100 lakh, net profit margin of 4% and asset turnover of 1.5 times. Its return on equity under the extended DuPont model is:

Return on equity is 15 percent. ROA is 4 percent times 1.5, which is 6 percent, and the equity multiplier is 100 divided by 40, which is 2.5. Multiplying 6 percent by 2.5 gives 15 percent.

  1. A6%
  2. B9%
  3. C15%Correct
  4. D24%

Explanation

ROA = 4% x 1.5 = 6%. Equity multiplier = 100/40 = 2.5. ROE = 6% x 2.5 = 15%. Check: sales = 150, profit = 6, 6/40 = 15%. The 6% option stops at ROA.

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