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8. ZX Limited has total assets of ` 7,20,000 and its Shareholders' equity is ` 4,50,000. The net profit margin of ZX Limited is 12.5% and asset turnover ratio is 1.5. Using the DuPont model, the return on equity of ZX Limited is calculated as :

Options

A7.03%
B50%
C11.72%
D30% Answer Key Question No. Answer
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Correct Answer

Option D30% Answer Key Question No. Answer

All Options:

  • A7.03%
  • B50%
  • C11.72%
  • D30% Answer Key Question No. Answer

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Detailed Solution & Explanation

Correct Answer: Option **D** Explanation: According to the DuPont Model, the Return on Equity (ROE) is decomposed into three component ratios:
textROE=textNetProfitMargintimestextAssetTurnoverRatiotimestextEquityMultiplier\\text{ROE} = \\text{Net Profit Margin} \\times \\text{Asset Turnover Ratio} \\times \\text{Equity Multiplier}
Where:
* textNetProfitMargin=12.5\\text{Net Profit Margin} = 12.5\\% = 0.125
* textAssetTurnoverRatio=1.5\\text{Asset Turnover Ratio} = 1.5
* textEquityMultiplier=fractextTotalAssetstextShareholdersEquity\\text{Equity Multiplier} = \\frac{\\text{Total Assets}}{\\text{Shareholders' Equity}}
**1. Calculate Equity Multiplier:**
Given that Total Assets = 7,20,000\displaystyle ` 7,20,000 and Shareholders' Equity = 4,50,000\displaystyle ` 4,50,000:
textEquityMultiplier=frac7,20,0004,50,000=1.6\\text{Equity Multiplier} = \\frac{7,20,000}{4,50,000} = 1.6
**2. Calculate Return on Equity (ROE):**
textROE=12.5\\text{ROE} = 12.5\\% \\times 1.5 \\times 1.6
textROE=12.5\\text{ROE} = 12.5\\% \\times 2.4 = 30\\%
Hence, **Option D** is the correct answer.

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