CFA Practice Question
An analyst applied the DuPont System to the following data for a company:
- Equity turnover 4.0
- Net profit margin 5.8%
- Total asset turnover 1.8
- Dividend payout ratio 27.8%
The company's return on equity is closest to ______.
A. 43.2%.
B. 15.4%.
C. 23.2%.
Explanation: ROE = Equity turnover x Net profit margin = 4.0 x 5.8% = 23.2%
User Contributed Comments 10
| User | Comment |
|---|---|
| parry89 | whatttt... i thought ROE = net profit margin x asset turnover x equity turnover?? |
| pepper | equity turnover = annual sales divided by its average stockholders' equity, so ROE = (net income / net sales) x (net sales / total assets) x (total assets / common equity) = (net profit margin) x (equity turnover). |
| kellyyang | wow, I almost forgot this formula. |
| cjpatel | so where did the ASSET turnover go??? |
| jerasmus | I was caught out here as well... As I understand it ROE = net profit margin x asset turnover x leverage. with equity turnover = asset turnover x leverage. Does this make sense? |
| dini85 | don't know whether this method correct (4.0/1.8) * 0.058 * 1.8 = 0.232 |
| erinelize | Ok so the equity turnover includes both TAT and leverage then. Thanks jerasmus! |
| bidisha | It's equity turnover NOT equity multilpier |
| berns23 | Good one |
| santibanez | Jerasmus is right ROE=net profit margin à |