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CMA Intermediate · Financial Management and Business Data Analytics · Financial Ratio Analysis

Arvind Ltd's ROE fell from 20% to 15% while its net profit margin stayed constant at 5%. In the year the equity multiplier rose from 2.0 to 2.5. What was the change in asset turnover from the earlier year to the current year?

Asset turnover fell from 2.0 to 1.2 times. Earlier ROE of 20% with 5% margin and multiplier 2.0 gives turnover 2.0. Now 15% divided by 5% margin and 2.5 multiplier gives 1.2. Leverage rose but efficiency dropped more.

  1. AFell from 2.0 to 1.2 timesCorrect
  2. BRose from 2.0 to 2.4 times
  3. CFell from 4.0 to 1.2 times
  4. DFell from 2.0 to 1.5 times

Explanation

Earlier: 20% = 5% x AT x 2.0, so AT = 2.0. Current: 15% = 5% x AT x 2.5, so AT = 15/12.5 = 1.2. Check: 0.05 x 1.2 x 2.5 = 0.15. The 1.5 option ignores the higher multiplier.

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