CA Intermediate · Financial Management and Strategic Management · Financial Analysis and Planning - Ratio Analysis
Verma Industries has a net profit margin of 5%, total asset turnover of 2 times and an equity multiplier of 3. Total assets are ₹50,00,000. Using the DuPont identity, what is the net profit (equity earnings) for the year?
Net profit is ₹5,00,000. Asset turnover of 2 on assets of ₹50,00,000 gives sales of ₹1,00,00,000, and a 5% net margin on that gives ₹5,00,000. The equity multiplier only affects return on equity, not the profit amount itself.
- A₹5,00,000Correct
- B₹15,00,000
- C₹7,50,000
- D₹1,66,667
Explanation
Sales = 2 × 50,00,000 = ₹1,00,00,000. Net profit = 5% × 1,00,00,000 = ₹5,00,000. Check: ROE = 5% × 2 × 3 = 30%; equity = 50,00,000/3 = 16,66,667; 30% of this = ₹5,00,000. ₹15,00,000 wrongly multiplies profit by the equity multiplier.
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