Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Question

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Answer 1

Question

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

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Students have asked these similar questions

Define each of the following terms: a. Liquid asset b. Liquidity ratios: current ratio; quick ratio c. Asset management ratios: inventory turnover ratio d. Debt management ratios: total debt to total capital; times-interest-earned (TIE) ratio e. Profitability ratios: profit margin; return on total assets (ROA); return on common equity (ROE); return on invested capital (ROIC); basic earning power (BEP) ratio f. Market value ratios: price/earnings (P/E) ratio; market/book (M/B) ratio; enterprise value/EBITDA ratio

Return on equity (ROE) using the traditional DuPont formula equals to A. (net profit margin) (interest component) (solvency ratio) B. (net profit margin) (interest component) (liquidity ratio) C. (net profit margin) (total asset turnover) (quick ratio) D. (net profit margin) (total asset turnover) (solvency ratio)

Profitability ratios include all of the following EXCEPT a.current ratio. b.asset turnover. c.return on total assets. d.price-earnings ratio.

Answer 2

Question

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

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Answer 3

Question

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

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Answer 4

Question

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

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Answer 5

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

Answer 6

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

Answer 7

Chapter 8, Problem 1MCQ

To determine

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Answer 8

Expert Solution & Answer

Answer to Problem 1MCQ

Option b. Inventory turnover is not included in the DuPont analysis of return on equity (ROE).

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Explanation of Solution

DuPont analysis of return on equity (ROE):

The DuPont ratio is one of the popular methods for analyzing performance and ratios. The DuPont ratio was derived by the Corporation D for measuring the performance of the entity in the form of return on equity ratio. The DuPont analysis breaks the return on equity into three different types of ratios which are:

Profit margin or profitability
Asset turnover or activity ratio
Financial leverage or solvency ratio

Return on equity (ROE) = (Profit margin × Operating leverage (or Asset turnover) × Financial leverage)= ((Net profit/Sales) × (Net profit/Sales)(Sales/Average total assets)× (Average total assets/Average equity))

Justification for correct and incorrect answer:

a.

Asset turnover: This is not the correct choice as the asset turnover is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the operating leverage.

b.

Inventory turnover: This option is the correct option because the inventory turnover ratio is not one of the components which are included in the DuPont analysis of return on equity (ROE).

c.

Financial leverage: This option is incorrect because the financial leverage is one of the components which are included in the DuPont analysis of return on equity (ROE). It denotes the solvency of the organization.

d.

Profit margin: This is an incorrect option because the profit margin is included in the DuPont analysis which is used for the profitability of the entity.

Answer 12

Ch. 8 - Prob. 1MCQ Ch. 8 - XBRL stands for: a. Extensible Business Reporting...Ch. 8 - Prob. 3MCQ Ch. 8 - Prob. 4MCQ Ch. 8 - Prob. 5MCQ Ch. 8 - Prob. 6MCQ Ch. 8 - Prob. 7MCQ Ch. 8 - What type of ratios measure a firms operating...Ch. 8 - What type of ratios measure a firms ability to pay...Ch. 8 - Prob. 10MCQ

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Identify the component which is not included in the DuPont analysis of return on equity (ROE).

Answer to Problem 1MCQ

Explanation of Solution

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