Question

King enterprises has an Total Asset Turnover ratio of 5.0, Profit margin of 3%, and a ROE equals to 18%. What is the firm's equity mulitplier (Total Asset/Equity)? Use DuPont Analysis.

Answer 1

Answer: 1.2

Explanation:

The DuPont Analysis is a method of calculating the Return on Equity by using various other ratios. It shows the relatiosnhips between variables in a firm and can help the firm know which areas to target to improve ROE.

Using the DuPont Analysis, the Return on Equity is;

ROE = Profit Margin * Asset Turnover * Equity Multiplier

18% = 3% * 5 * Equity Multiplier

18% = 0.15 * Equity Multiplier

Equity Multiplier = 18%/0.15

Equity Multiplier = 1.2