Which of the following can be used to compute the return on equity?
I.Profit margin × Return on assets
II.Return on assets × Equity multiplier
III.Net income/Total equity
IV.Return on assets × Total asset turnover
A)I and III only
B)II and III only
C)II and IV only
D)I, II, and III only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

II and III are correct methods for computing the return on equity. II uses the DuPont identity, which breaks down ROE into three components: profit margin, asset turnover, and equity multiplier, where ROA (Return on Assets) multiplied by the equity multiplier gives ROE. III is the direct calculation method of ROE, using net income divided by total equity.

Which of the Following Can Be Used to Compute the Return