Asked by Laura Ramos on Jun 12, 2024
Verified
Using the Du Pont Identity Method, calculate return on equity given the following information. Profit margin 18%; total asset turnover 0.70; equity multiplier 1.1.
A) 12.16%
B) 13.86%
C) 14.16%
D) 15.86%
E) 16.16%
Return On Equity
A measure of a company's profitability, calculated by dividing net income by shareholder equity.
Du Pont Identity Method
The Du Pont Identity Method is a financial analysis framework that breaks down a company's return on equity into three parts: profitability, asset efficiency, and financial leverage.
Total Asset Turnover
A financial ratio that measures the efficiency of a company's use of its assets in generating sales revenue; calculated by dividing sales revenue by total assets.
- Utilize the Du Pont Analysis to scrutinize factors impacting an organization's return on equity.
Verified Answer
KG
Kirti GolichaJun 16, 2024
Final Answer :
B
Explanation :
The Du Pont Identity formula for return on equity (ROE) is: ROE = Profit Margin * Total Asset Turnover * Equity Multiplier. Substituting the given values: ROE = 18% * 0.70 * 1.1 = 0.1386 or 13.86%.
Learning Objectives
- Utilize the Du Pont Analysis to scrutinize factors impacting an organization's return on equity.