CFA Practice Question

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.
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 Ã
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