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DuPont equation

Return on Equity = (Net Income/Sales) * (Sales/Assets) * (Asset/Equity)
You may also see ROE = (Net Profit Margin) *
(Asset Turnover) * (Equity Multiplier)
 
Question:

Firm has net profit margin of 10%; asset turnover of
1.5; a financial leverage of 1.2 times

Ans:

Return on equity = (10)(1.5)(1.2) = 18%
Extended DuPont equation

Return on Equity = (Net Income/EBT) * (EBT/EBIT) *

(EBIT/ Revenue) * (Revenue/ Avg. Total Asset) *

(Avg. Total Asset/ Avg. Equity)

ROE = Tax Burden * Interest Burden * EBIT Margin *

Asset Turnover * Leverage
 
Question:

Firm has o/p profit margin of 10%; asset turnover of 1.5; a financial leverage of 1.2 times; tax rate of 25%; and interest burden rate of 15%.

Ans:
Return on equity = (75/25)*15%*10%*1.5*1.2 = 8.1%




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