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    Question

    Equity Multiplier allows the Investors to see: (In DuPont Analysis)

    A What proportion of interest on debt can be covered from earnings available to equity shareholders Correct Answer Incorrect Answer
    B How many times preference shares interest be paid from earnings available to equity shareholders Correct Answer Incorrect Answer
    C What portion of the return on equity is the result of debt Correct Answer Incorrect Answer
    D How value of debt is calculated from the value of equity Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Dupont analysis helps to identify the source of a company’s return. It gives an expanded form of the RoE of the company by breaking down the RoE into three ratios related to profitability (net profit margin), operational efficiency (total asset turnover), and financial leverage (equity multiplier). Thus, it’s helpful in analyzing the reason for the profitability of a company. As per DuPont analysis,   RoE = Net profit margin * asset turnover * financial leverage Financial Leverage = Assets/Shareholders’ Equity It is possible for a company with terrible sales and margin to take on excessive debt and artificially increase its return on equity. The equity multiplier allows the investors to see what proportion of return on equity is of debt.

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