- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model

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**CFA Practice Question**

Compute the return on equity for a company with profit margin of 2%, total asset turnover of 6 times, and total assets divided by equity of 1.2.

A. 14.4%

B. 16.67%

C. Neither of the above is correct.

**Explanation:**The return on equity can be computed as the product of profit margin, total asset turnover, and financial leverage (measured as total assets divided by equity), or 2 x 6 x 1.2 = 14.4%.

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