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Mark Anderson, financial analyst, is discussing the ways to analyze a firm’s return on equity (ROE) with his colleague. While discussing the DuPont system of analysis, Mark states, “The DuPont equation is very useful in the analysis of return on equity. It breaks ROE into three key components – net profit margin, asset turnover and equity multiplier.”
His colleague agrees and adds, “If any one of the three components – net profit margin, asset turnover or use of equity increases, ROE will increase.”
Are the statements made by Mark and his colleague correct?
- Mark is right, but his colleague is wrong
- Mark is wrong, but his colleague is right
- Both of them are right
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I’m not sure what you mean by ‘use of equity’… @exam_whiz?
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@policedog just kicking butt and taking names 🙂
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Thanks for the clarifications @jak5189 and @exam_whiz!
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@hairyfairy I’ll probably hit a rut at some point 🙂
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@jak5189 What topic do you need the most work on? I can throw a tough one on next week to give others a chance to catch up 🙂 @hairyfairy
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The correct answer of this one is A.
The DuPont equation is very useful in the analysis of return on equity. It breaks ROE into three key components – net profit margin, asset turnover, and equity multiplier. Equity multiplier is the ratio assets/equity. It increases as the use of debt financing increases. Thus, his colleague is wrong.
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@exam_whiz Demand and Supply Analysis: The Firm and The Firm and Market Structures are tough ones for me. Lets see what you got to whip me into shape 🙂
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