101 Concepts for the Level I Exam

DuPont analysis decomposes a firm’s ROE to better analyze a firm’s performance.

**Start with ROE**

**Traditional DuPont equation** is:

**Extended DuPont equation** is:

An analyst has gathered the following information about a company:

- Operating profit margin = 12%
- Average tax rate = 30%
- Asset turnover ratio = 2 times
- Financial leverage multiplier = 1.5 times
- Interest burden = 0.6 times

Calculate the company’s ROE.

__Solution__**:**

Tax burden = 1 – tax rate = 1 – 0.3 = 0.7

ROE = 0.7 x 0.6 x 0.12 x 2 x 1.5 = 0.1512 = 15%