Two companies operating in the same industry achieved the same return on equity with the same net sales; the two companies were different with respect to return on total assets. Compared with the company that had the higher return on total assets, the company with the lower return on total assets most likely had a higher ______.

A. total asset turnover
B. financial leverage multiplier
C. proportion of common equity in its capital structure

Correct Answer: B

The DuPont system can be used to break down return on equity (ROE) into three components: profit margin, total asset turnover, and financial leverage multiplier. The first two components can be multiplied to calculate the return on total assets (ROA). If the two companies have the same ROE, the company with the lower ROA must have a higher financial leverage multiplier (lower proportion of common equity in the capital structure).