Multiple Choice
According to the DuPont identity, which three financial ratios are multiplied together to calculate Return on Equity (ROE)?
14. Financial Statement Analysis
Ratios: DuPont Model for Return on Equity (ROE)
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Which one of the following does NOT affect Return on Equity (ROE) according to the DuPont identity?
A
Inventory valuation method
B
Tax rate
C
Asset turnover
D
Equity multiplier
Verified step by step guidance1
Understand the DuPont identity formula for Return on Equity (ROE), which breaks ROE into three components: ROE = (Net Income / Revenue) × (Revenue / Total Assets) × (Total Assets / Equity). These components are Profit Margin, Asset Turnover, and Equity Multiplier.
Analyze each option provided in the question to determine whether it directly impacts one of the components of the DuPont identity formula.
Option 1: Inventory valuation method - This affects the calculation of Cost of Goods Sold (COGS), which impacts Net Income but does not directly influence the DuPont identity components.
Option 2: Tax rate - This directly affects Net Income, which is part of the Profit Margin component in the DuPont identity formula.
Option 3: Asset turnover and Option 4: Equity multiplier - Both are explicitly part of the DuPont identity formula and directly impact ROE.
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