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CFA Level I · CFA Level I Exam · Financial Analysis Techniques

In a five-step extended DuPont analysis, a company's ROE falls while its asset turnover and equity multiplier are unchanged. Its tax burden (net income/EBT) is unchanged, but its interest burden (EBT/EBIT) has dropped from 0.90 to 0.75. The change is most likely explained by:

The fall is most likely due to higher interest expense relative to operating income. The interest burden, EBT divided by EBIT, decreases when more of EBIT is consumed by interest. The tax burden is unchanged and EBIT margin is a different component.

  1. Aa higher effective tax rate on pre-tax profit
  2. Ba lower operating profit margin on revenue
  3. Chigher interest expense relative to operating incomeCorrect

Explanation

Interest burden is EBT divided by EBIT. A fall means a larger share of EBIT is absorbed by interest expense. Tax burden is stated as unchanged, so taxes are not the cause, and EBIT margin is a separate component that is not described as changing.

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