Question

A corporation has a return on equity of 18%. It has a total asset turnover ratio of 2. If it has a profit margin of 6%, what is its equity multiplier?

Answer 1

1.5

Step-by-step explanation:

In this question, we applied the DuPont Analysis which are shown below:

Return on equity = Profit margin × Total assets turnover × Equity multiplier

where,

Return on equity = 18%

Profit margin = 6%

And, the total asset turnover is 2

Now, the equity multiplier is

18% = 6% × 2 × Equity multiplier

18% = 12% × Equity multiplier

So, the equity multiplier is

= 18% ÷ 12%

= 1.5