Question

In the 5-way dupont deconstruction, which of the following would lead to an increase in return on equity (roe), all else kept equal?

1) Increase in net profit margin
2) Increase in total asset turnover
3) Increase in financial leverage
4) Increase in tax rate

Answer 1

ROE would increase if there is an increase in net profit margin, total asset turnover, or financial leverage. An increase in tax rate typically reduces ROE.

Option 4. increase in tax rate is not correct.

Step-by-step explanation:

In the 5-way DuPont deconstruction, which of the following would lead to an increase in return on equity (ROE), all else kept equal? The correct options are:

Increase in net profit margin

Increase in total asset turnover

Increase in financial leverage

An increase in tax rate would generally lead to a decrease in ROE, as it would reduce the net income available to equity holders. Therefore, the fourth option is not correct.