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

Case: Mahi Foods Ltd has revenue ₹500 crore, net profit ₹40 crore, average total assets ₹400 crore and average shareholders' equity ₹160 crore. Next year, management plans to raise the asset turnover by 20% and keep net margin and equity multiplier unchanged. Using the DuPont identity, what will be the projected return on equity next year?

Current ROE is 8 percent margin times 1.25 asset turnover times 2.5 equity multiplier, which is 25 percent. Raising turnover by 20 percent to 1.5 while holding the other two ratios constant gives 8 percent times 1.5 times 2.5, equal to 30 percent.

  1. A25%
  2. B30%Correct
  3. C35%
  4. D20%

Explanation

Current: net margin 40/500 = 8%; asset turnover 500/400 = 1.25; equity multiplier 400/160 = 2.5. ROE = 8% × 1.25 × 2.5 = 25%. With turnover up 20% to 1.5, ROE = 8% × 1.5 × 2.5 = 30%. The 25% option is the current ROE.

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