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This is 25% + 40% ? 10% + 40%. The DuPont Equation for return on equity is the product of the net profit margin, the total asset turnover, and the equity multiplier, as follows: ROE = Net Income Net Sales × Net Sales Total Assets × Total Assets Total Equity Furthermore, the result of a percentage increase or decrease is represented by 1 + the percentage of increase (or 1 ? the percentage of decrease), not by the percentage of increase or decrease alone.
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The DuPont Equation for Return on Equity is ROE = Net Income Net Sales × Net Sales Total Assets × Total Assets Total Equity Net Income divided by Net Sales is the Net Profit Margin. A 25% increase in the Net Profit Margin for Year 2 is represented by the Year 1 Net Profit Margin × 1.25. Net Sales divided by Total Assets is the Total Asset Turnover. A 40% increase in Total Asset Turnover for Year 2 is represented by the Year 1 Total Asset Turnover × 1.40. A 10% decrease in Total Assets for Year 2 is represented by the Year 1 Total Assets × .90. A 40% increase in Total Equity for Year 2 is represented by Year 1 Total Equity × 1.40. Using these values, the value of ROE for Year 2 compared with Year 1 is: ROE = 1.25 × 1.40 × .90 1.40 Or: ROE = 1.25 × 1.40 × .64286 ROE = 1.125 Thus, Year 2 ROE is equal to Year 1 ROE multiplied by 1.125, which would represent an increase of .125 or 12.5%.
This is 25% (the percentage increase in net profit margin) multiplied by 40% (the percentage increase in total asset turnover). In addition to the net profit margin and the total asset turnover, the DuPont Equation for return on equity includes the equity multiplier, or Total Assets divided by Total Equity, as well. ROE = Net Income Net Sales × Net Sales Total Assets × Total Assets Total Equity Furthermore, the result of a percentage increase or decrease is represented by 1 + the percentage of increase (or 1 ? the percentage of decrease), not by the percentage of increase or decrease alone.