1.
corporate decision makers and analysis often use a particular technique, DuPont analysis to
better understand the factors that drive company performance, as reflected in its return on equity
(ROE). By using the changed for the DuPont equation, which disaggregates its ROE into three
components, analysts can see why the company's ROE may have changed for the better or
worse and identify company strengths and weaknesses.
Solution
Correct answer is efficiency in use of total assets and financial leverage. as the Dupont analysis
is done with the formula profit margin x total assets turnover x equity multiplier which is also
called leverage factor.
Correct answer is the main driver of company A's inferior ROE, as compared to that of company
B's and company C's ROE, is the use of higher debt financing. As the company A equity
multiplier is less than compared to other company. Multiplier is equal to total assets/ total stock
holder's equity. IF the debt capital is used more the multiplier would be low.