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CMA Intermediate · Financial Management and Business Data Analytics · Financial Ratio Analysis

Sundaram Textiles Ltd has a net profit margin of 6%, total asset turnover of 2.5 times and an equity multiplier of 1.8. Its return on equity under the three-step DuPont identity is:

ROE is 27%. Under DuPont, ROE equals net profit margin times asset turnover times equity multiplier, so 6% x 2.5 x 1.8 gives 27%. The 15% figure is only return on assets because it leaves out financial leverage.

  1. A15.0%
  2. B27.0%Correct
  3. C10.8%
  4. D4.8%

Explanation

ROE = net profit margin x asset turnover x equity multiplier = 6% x 2.5 x 1.8 = 27%. Multiplying only margin and turnover gives 15%, which is ROA and ignores leverage. Check: 0.06 x 2.5 = 0.15; 0.15 x 1.8 = 0.27.

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