A company has a Net Profit Margin of 5%, an Asset Turnover of 2.0, and an Equity Multiplier (Assets/Equity) of 1.5. What is the Return on Equity (ROE) according to the DuPont Identity?

Answer options:

10%

7.5%

15%

12.5%

How to approach this question

DuPont Formula: ROE = Profit Margin × Asset Turnover × Equity Multiplier.

Full Answer

C.15%✓ Correct

The DuPont Identity breaks ROE into three parts: Profitability (Margin), Efficiency (Turnover), and Leverage (Multiplier). 0.05 × 2.0 × 1.5 = 0.15 or 15%.

Common mistakes

Adding the components instead of multiplying.

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