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CA Final · Financial Reporting · Analysis of Financial Statements

Rohan Foods Ltd: net profit margin 5%, total asset turnover 2 times, and equity multiplier (total assets/equity) 1.5. Under the DuPont analysis, what is the return on equity, and if the margin rises to 6% with other factors unchanged, what is the new ROE?

ROE equals margin times asset turnover times equity multiplier: 5% x 2 x 1.5 gives 15%. When margin rises to 6% with other factors constant, ROE becomes 6% x 2 x 1.5 = 18%.

  1. A10%; 12%
  2. B15%; 18%Correct
  3. C7.5%; 9%
  4. D15%; 16.5%

Explanation

ROE = 5% x 2 x 1.5 = 15%. With margin 6%: 6% x 2 x 1.5 = 18%. Option 10% omits the equity multiplier, while 16.5% wrongly adds 1.5 percentage points.

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