ExpertEasy1 markMultiple Choice
CPA · Question 41 · Area I: Business Analysis
A company has a Net Profit Margin of 5%, an Asset Turnover of 2.0, and an Equity Multiplier (Assets/Equity) of 1.5. What is the Return on Equity (ROE) according to the DuPont Identity?
A company has a Net Profit Margin of 5%, an Asset Turnover of 2.0, and an Equity Multiplier (Assets/Equity) of 1.5. What is the Return on Equity (ROE) according to the DuPont Identity?
Answer options:
A.
10%
B.
7.5%
C.
15%
D.
12.5%
How to approach this question
DuPont Formula: ROE = Profit Margin × Asset Turnover × Equity Multiplier.
Full Answer
C.15%✓ Correct
The DuPont Identity breaks ROE into three parts: Profitability (Margin), Efficiency (Turnover), and Leverage (Multiplier). 0.05 × 2.0 × 1.5 = 0.15 or 15%.
Common mistakes
Adding the components instead of multiplying.
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