A company with net sales of \$820,000 and net income of \$210,000, average total assets of \$1,400,000 and average common equity of \$940,000 is using the DuPont Model for financial analysis. What is the company's ROE?

• A. 22.3%
• B. 87.2%
• C. 15.0%
• D. 58.5%

Answer: (A)

Verified step by step guidance

1. Understand the DuPont Model: The DuPont Model breaks down Return on Equity (ROE) into three components: Profit Margin, Asset Turnover, and Equity Multiplier.
2. Calculate Profit Margin: Profit Margin is calculated as Net Income divided by Net Sales. Use the formula: \( \text{Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} \).
3. Calculate Asset Turnover: Asset Turnover is calculated as Net Sales divided by Average Total Assets. Use the formula: \( \text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}} \).
4. Calculate Equity Multiplier: Equity Multiplier is calculated as Average Total Assets divided by Average Common Equity. Use the formula: \( \text{Equity Multiplier} = \frac{\text{Average Total Assets}}{\text{Average Common Equity}} \).
5. Combine the components to find ROE: Multiply the Profit Margin, Asset Turnover, and Equity Multiplier to find the ROE. Use the formula: \( \text{ROE} = \text{Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier} \).