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CA Final · Financial Reporting · Analysis of Financial Statements

Meera Industries Ltd has net profit margin 5%, total asset turnover 2 times and equity multiplier (total assets/equity) 1.5. Under the DuPont analysis, its return on equity is:

Return on equity is 15%. Net margin of 5% multiplied by asset turnover of 2 gives return on assets of 10%, and multiplying by the equity multiplier of 1.5 gives 15%. The 10% figure omits the effect of financial leverage.

  1. A10%
  2. B15%Correct
  3. C7.5%
  4. D20%

Explanation

ROA = 5% x 2 = 10%. ROE = ROA x equity multiplier = 10% x 1.5 = 15%. Stopping at 10% ignores financial leverage, which is the key distractor error.

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