CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

You are given the following financial data: net income/sales = 4%; sales/total assets = 4.5; debt/total assets = 60%. What is the firm's return on equity?

A. 8.5%
B. 18%
C. 45%
Correct Answer: C

User Contributed Comments 17

User Comment
kalps How is this calculated, are they saying it is Sales/total assets ????
gjwhite equity = assets - liab --> equity/assets = 1 - liab/assets = 1 - .6 = .4 --> assets/equity = 1/.4 = 2.5 = financial leverage therefore ROE = 4 x 4.5 x 2.5 = 45
cbb1 Return on Equity =
Operating Profit % of 4%
Multiplied By
Asset Turnover (sales/total asset) of 4.5
Multiplied by
Equity Multiplier (asset/equity) of 2.5

Compute the 2.5 since debt to total assets equals 60%, equity to total assets must be 40% and then take the reciprocal results in 2.5
richcfa2 don't forget this if they ask** trick
mtcfa I guess this makes the previous question valid.
ninagraham how did they calculate the equity multiplier as 2.5?
jasonk hi nina,

take a look at answer/explanation from cbb1.
todolist Cool Q.
viannie asset = liability + equity
if debt / asset = 60%

asset being 100%, then equity/total asset = 40%

total asset = 1/0.4 = 2.5

thanks cbb1!
rocyang indeed cool question. But, how can you determine if the final output should be in percentage?
Gpcurve Assume Assets = 100
Sales = 4.5 x 100 = 450
NOI = 450 x 4% = 18
Equity = 100 x (1-60%) = 40
ROE = 18/40 = 45%
bsm9 Thanks gpcurve!
KarenMaciel i like this question!!!
robertucla Analystnotes pisses me off when doesn't provide solution.
ldfrench ^Heard that, brother
Kevdharr If a firm's debt/total assets ratio is 60%, then it stands to reason that their equity/total assets would be 40%. DuPont formula requires you to use the equity multiplier in which is total assets/common equity. So if you just take the inverse of equity/total assets (which is 40%), you get 2.5 (1/.4=2.5). You are already given the other two parts of the equation. So just multiply 4*4.5*2.5 and you get 45.
ioanaN assets=debt+equity
debt/assets+equity/assets=1
equity/assets=1-debt/assets=1-0.6=0.4
assets/equity=1/0.4=2.5
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