1215

The traditional DuPont equation shows ROE equal to:

A) net income/sales × sales/assets × assets/equity.

B) EBIT/sales × sales/assets × assets/equity × (1 – tax rate).

C) net income/assets × sales/equity × assets/sales.

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Profit margin × asset turnover × financial leverage. Although net income/assets × sales/equity × assets/sales also yields ROE, it is not the DuPont equation.

1215

 

An analyst has gathered the following information about a company.

• The total asset turnover is 1.2.

• The after-tax profit margin is 10%.

• The financial leverage multiplier is 1.5.

Given this information, the company’s return on equity is:

A) 18%.

B) 12%.

C) 9%.

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ROE = profit margin × total asset turnover × financial leverage
ROE = (0.1)(1.2)(1.5) = 0.18 or 18.0%