If net profit margin is 4%, asset turnover is 1.8, and equity multiplier is 1.6, what is ROE according to the DuPont formula?

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Multiple Choice

If net profit margin is 4%, asset turnover is 1.8, and equity multiplier is 1.6, what is ROE according to the DuPont formula?

Explanation:
DuPont analysis breaks ROE into three pieces: profit margins, how effectively assets are used, and financial leverage. ROE = Net profit margin × Asset turnover × Equity multiplier. Plugging in the numbers: 0.04 × 1.8 = 0.072. Then 0.072 × 1.6 = 0.1152, which is 11.52%, or about 11.5%. So the ROE is around 11.5%. The 7.2% result would come from missing the leverage factor (equity multiplier), and the other values would require higher or different leverage than 1.6.

DuPont analysis breaks ROE into three pieces: profit margins, how effectively assets are used, and financial leverage. ROE = Net profit margin × Asset turnover × Equity multiplier.

Plugging in the numbers: 0.04 × 1.8 = 0.072. Then 0.072 × 1.6 = 0.1152, which is 11.52%, or about 11.5%.

So the ROE is around 11.5%. The 7.2% result would come from missing the leverage factor (equity multiplier), and the other values would require higher or different leverage than 1.6.

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