Practice question · Multiple choice
A firm's ROE is 18% but its ROA is only 6%. The DuPont leverage multiplier must be:
Hints
- ROE = ROA x leverage multiplier (approximately).
Show the answer
B. 3.0, heavy leverage
Why
. The firm's assets earn 6 cents on the euro, but leverage triples it to 18 cents for owners, as long as the borrowed money costs less than 6%.
Practise Financial Statement Analysis
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More questions on Financial Statement Analysis
- EBIT 450, interest expense 90. Estimate the interest cover ratio.
- Liquidity, solvency, or profitability ratio?
- Match each DuPont component to its formula.
- A firm's ROE rises from 12% to 20% while its ROA is unchanged. What has management actually done?
- Which benchmarks make a ratio meaningful?
- A firm reports rising profit and an interest cover falling toward 1. What does that combination indicate?