A company has a net profit margin of 8%, a total asset turnover of 1.5 times and an equity multiplier (total assets / shareholders' equity) of 2. Using the DuPont analysis, its return on equity is:

Correct answer: B) 24%

Explanation

Under DuPont analysis, ROE = net profit margin x asset turnover x equity multiplier = 8% x 1.5 x 2 = 24%. The figure 12% is return on assets (8% x 1.5), which leaves out financial leverage. The figure 16% multiplies the margin by the equity multiplier only.