Chapter 4, Problem 6P

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Chapter
Section

### Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

# DuPONT AND ROE A firm has a profit margin of 3% and an equity multiplier of 1.9. Its sales are $150 million, and it has total assets of$60 million. What is its ROE?

Summary Introduction

To determine: Return on equity.

Introduction:

DuPont Analysis:

Under DuPont analysis the return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.

Explanation

Given,

Equity multiplier is 1.9.

Profit margin is 3%.

As per DuPont equation:

Formula to calculate return on equity,

ReturnĀ onĀ equity=(ProfitāmarginĆTotalĀ assetsĀ turnoverāratioĆEquityĀ multiplier)

Substitute, 3% for profit margin, 2.5Ć for total assets turnover ratio (working note), and 1.9 for equity multiplier in the above formula

ReturnĀ onĀ equity=3%Ć2.5Ć1

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