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

Meera Industries has net profit margin 6%, total asset turnover 2.5 times and equity multiplier (total assets/equity) 1.8. Under the DuPont analysis, with total assets of Rs 20,00,000, what is the net profit (profit after tax) for the year?

Net profit is Rs 3,00,000. Sales equal asset turnover of 2.5 times total assets of Rs 20,00,000, which is Rs 50,00,000. Applying the 6% net margin gives Rs 3,00,000. The equity multiplier affects return on equity, not the profit amount itself.

  1. ARs 3,00,000Correct
  2. BRs 5,40,000
  3. CRs 2,70,000
  4. DRs 3,60,000

Explanation

Sales = asset turnover x total assets = 2.5 x 20,00,000 = Rs 50,00,000. Net profit = 6% x 50,00,000 = Rs 3,00,000. Check: equity = 20,00,000/1.8 = 11,11,111; ROE = 3,00,000/11,11,111 = 27% = 6% x 2.5 x 1.8. Rs 5,40,000 wrongly multiplies profit by the equity multiplier.

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