XYZ Company had a profit margin of 8.8%, total asset turnover of 0.77, and an equity multiplier of 1.8. What is XYZ's Return on Equity using the DuPont Model?

• A. 12.2%
• B. 3.76%
• C. 20.57%
• D. 11.37%

Answer: (A)

Verified step by step guidance

1. Understand the DuPont Model formula for Return on Equity (ROE), which is: ROE = Profit Margin x Total Asset Turnover x Equity Multiplier.
2. Identify the given values from the problem: Profit Margin = 8.8% or 0.088, Total Asset Turnover = 0.77, and Equity Multiplier = 1.8.
3. Convert the profit margin percentage into a decimal for calculation purposes by dividing by 100, resulting in 0.088.
4. Substitute the given values into the DuPont Model formula: ROE = 0.088 x 0.77 x 1.8.
5. Perform the multiplication step-by-step: first multiply the profit margin by the total asset turnover, then multiply the result by the equity multiplier to find the ROE.