Using the DuPont system of analysis, holding other factors constant, an increase in financial leverage will result in ________.
A) an increase in the return on equity
B) a decrease in the gross profit margin
C) an increase in the gross profit margin
D) an increase in retained earnings

Question

Quizplus · Accepted Answer

According to the DuPont system of analysis, return on equity (ROE) is calculated by multiplying Net Profit Margin (NPM) with Asset Turnover (ATO) and multiplying the resultant value with Financial Leverage (FL). Therefore, an increase in financial leverage will increase ROE, assuming NPM, ATO, and FL remain constant.

Using the DuPont System of Analysis, Holding Other Factors Constant