CFA Level I · CFA Level I Exam · Financial Analysis Techniques
Company P has a five-step DuPont profile: tax burden 0.75, interest burden 0.80, EBIT margin 10%, total asset turnover 1.50 and equity multiplier 2.00. Revenue is 800 million. Company P's net income is closest to:
Net income is about 48 million. Net margin equals tax burden 0.75 times interest burden 0.80 times EBIT margin 10%, which is 6.0%. Applied to revenue of 800 million this gives 48 million. Asset turnover and leverage do not change net income here.
- A48 million
- B72 millionCorrect
- C96 million
Explanation
Net margin = 0.75 x 0.80 x 10% = 6.0%. Net income = 6.0% x 800 = 48 million. ROE = 6% x 1.5 x 2 = 18%. Equity = 800/1.5 = 533.3 assets/2 = 266.7; 18% x 266.7 = 48. Check passes; so the key is 48. The 72 million figure ignores the interest burden... recompute: 0.75 x 10% x 800 = 60, not 72, so net income is 48.
Did you get it right without looking?
One question tells you little. A timed set on Financial Analysis Techniques shows your real accuracy, how long you take and where you lose marks.
More Financial Analysis Techniques questions
- In a five-step extended DuPont analysis, a company's ROE falls while its asset turnover and equity multiplier are unchanged. Its tax burden …
- A company's ROA rose over the year, while its net profit margin fell. Holding other factors constant, this combination is most likely explai…
- Which of the following is the most likely limitation of using ratio analysis based on a single year-end balance sheet for a seasonal busines…
- A company reports net income of 90 million, revenue of 1,200 million, average total assets of 900 million and average shareholders' equity o…
- A firm's cash conversion cycle is calculated from the following data: days of inventory on hand 55, days of sales outstanding 38, and number…
- An analyst observes that a company's inventory turnover has declined while its gross margin has remained stable and sales have grown slowly.…