Question

East Aviation had a profit margin of 5.2%, a total assets turnover of 1.5, and an equity multiplier of 1.1. What was the firm's ROE? (Hint: Use the DuPont Identity)

A. 2.40%
B. 8.58%
C. 7.80%
D. 5.28%
E. 12.48%

Answer 1

East Aviation's Return on Equity (ROE) is calculated using the DuPont Identity, which involves multiplying the profit margin (5.2%), total assets turnover (1.5), and equity multiplier (1.1). The calculated ROE comes out to be 8.58%, which corresponds to answer choice B.

Step-by-step explanation:

To calculate the firm’s Return on Equity (ROE) using the DuPont Identity, we need to multiply together the firm's profit margin, total assets turnover, and equity multiplier. The DuPont Identity is given by the formula:

ROE = Profit Margin × Total Assets Turnover × Equity Multiplier

Given that East Aviation had a profit margin of 5.2%, a total assets turnover of 1.5, and an equity multiplier of 1.1, we can calculate the ROE as follows:

ROE = 0.052 × 1.5 × 1.1 = 0.0858 or 8.58%

Therefore, the correct answer is B. 8.58%.