Which statement regarding the Du Pont analysis is correct?
A)Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.
B)Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.
C)The modified Du Pont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.
D)Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.

Question

Quizplus · Accepted Answer

The Du Pont analysis breaks down Return on Equity (ROE) into three components: profit margin, total asset turnover, and financial leverage. An increase in profit margin and financial leverage (through increased debt) can offset a decrease in total asset turnover, potentially leading to an increase in ROE.

Which Statement Regarding the Du Pont Analysis Is Correct