If we know that a firm has a net profit margin of 4.5 % total asset turnover of 0.65, and a financial leverage multiplier of 1.47, what is its​ ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock​ equity?

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Asked Sep 15, 2019
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If we know that a firm has a net profit margin of 4.5 % total asset turnover of 0.65, and a financial leverage multiplier of 1.47, what is its​ ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock​ equity?

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Expert Answer

Step 1

Calculation of ROE:

The ROE is 4.30%.

...
ROE = [Net Pr ofit M arg inx Total Asset Turnover x Financial Leverage]
[4.5%x 0.65 x1.47]
0.042998 or4.30%
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ROE = [Net Pr ofit M arg inx Total Asset Turnover x Financial Leverage] [4.5%x 0.65 x1.47] 0.042998 or4.30%

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