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CMA Final · Strategic Financial Management · Fundamental Analysis and Technical Analysis

Kaveri Ltd has total assets turnover of 2.5 times, net profit margin of 4% and an equity multiplier (total assets/equity) of 1.8. Using the DuPont identity, what is its return on equity?

Return on equity is 18%. Net profit margin of 4% times asset turnover of 2.5 gives a return on assets of 10%, and multiplying by the equity multiplier of 1.8 adds the leverage effect. Stopping at 10% would ignore financial leverage in the DuPont identity.

  1. A10.0%
  2. B14.4%
  3. C18.0%Correct
  4. D7.2%

Explanation

ROA = 4% x 2.5 = 10%. ROE = ROA x equity multiplier = 10% x 1.8 = 18%. The option 10% ignores leverage, and 7.2% wrongly multiplies margin by the multiplier without turnover.

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