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

A firm's net profit margin is 5%, total asset turnover is 2 times and equity multiplier is 1.8. Its return on equity under the DuPont analysis is:

DuPont ROE equals net margin times asset turnover times equity multiplier. That is 5 percent times 2 times 1.8, which gives 18 percent. Stopping at ROA of 10 percent would ignore financial leverage.

  1. A10%
  2. B18%Correct
  3. C9%
  4. D14%

Explanation

ROA = 5% × 2 = 10%. ROE = 10% × 1.8 = 18%. Option 1 omits the leverage effect.

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