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CS Executive · Corporate Accounting and Financial Management · Financial Statement Analysis

Net profit margin of Kavya Ltd is 8%, total asset turnover is 2.5 times and total assets to equity multiplier is 2. Using the DuPont identity, return on equity is:

Return on equity is 40%. Under the DuPont identity it equals net profit margin of 8% times asset turnover of 2.5 times equity multiplier of 2. The 20% figure is only return on assets, because it ignores financial leverage.

  1. A20%
  2. B40%Correct
  3. C16%
  4. D10%

Explanation

ROE = net margin × asset turnover × equity multiplier = 8% × 2.5 × 2 = 40%. Omitting the multiplier gives 20%, which is return on assets, so it is not ROE.

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