Skip to content

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

Hemant Ltd has a debt-equity ratio of 1.5:1 and total assets of Rs 50,00,000. Its net profit margin is 6%, total asset turnover is 2 times. Using the DuPont identity, what is its return on equity?

Return on equity is 30%. ROA is 6% margin times 2 asset turnover, which is 12%. A debt-equity ratio of 1.5 means equity is 40% of assets, so the equity multiplier is 2.5, and 12% times 2.5 gives 30%.

  1. A30%Correct
  2. B12%
  3. C20%
  4. D18%

Explanation

ROA = 6% x 2 = 12%. Equity multiplier = assets/equity. With D/E = 1.5, equity = 40% of assets, so multiplier = 2.5. ROE = 12% x 2.5 = 30%. Using 12% ignores leverage.

Did you get it right without looking?

One question tells you little. A timed set on Financial Analysis and Planning - Ratio Analysis shows your real accuracy, how long you take and where you lose marks.

Practise Financial Analysis and Planning - Ratio AnalysisFree diagnostic mock

More Financial Analysis and Planning - Ratio Analysis questions