Question

If a retailer has a net profit margin of 3 percent, asset turnover of 4.0x, and financial leverage of 2.0x, then its return on net worth is:

1) 6 percent
2) 8 percent
3) 12 percent
4) 24 percent
5) 48 percent

Answer 1

Using the extended DuPont formula, with a net profit margin of 3 percent, asset turnover of 4.0x, and financial leverage of 2.0x, the return on net worth is calculated to be 24 percent.

Step-by-step explanation:

To calculate the return on net worth, also known as return on equity (ROE), we use the extended DuPont formula, which combines the net profit margin, asset turnover, and financial leverage. The formula is ROE = Net Profit Margin × Asset Turnover × Financial Leverage. Given a net profit margin of 3 percent, asset turnover of 4.0x, and financial leverage of 2.0x, the return on net worth is calculated as follows:

ROE = 0.03 (Net Profit Margin) × 4.0 (Asset Turnover) × 2.0 (Financial Leverage) = 0.24 or 24 percent.

Therefore, the return on net worth is 24 percent.