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CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis

A firm has net profit margin of 5%, total asset turnover of 3 times and an equity multiplier of 2. Under the DuPont analysis, what is its return on equity?

Return on equity is 30 percent. DuPont analysis multiplies net profit margin of 5 percent by asset turnover of 3 and equity multiplier of 2, giving 30 percent. Ignoring the equity multiplier would give 15 percent, which understates the return to shareholders.

  1. A15%
  2. B20%
  3. C30%Correct
  4. D10%

Explanation

ROE = net profit margin × asset turnover × equity multiplier = 5% × 3 × 2 = 30%. Option 15% omits the equity multiplier, which is the key error.

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