By NEAS - 8/1/2018 9:47:27 PM
FA Module 7 DuPont analysis reverse practice exam questions
(The attached PDF file has better formatting.)
A firm has
● an effective tax rate of 10%
● an interest coverage ratio of 6.2
● an EBIT (earnings before interest and taxes) margin of 42%
● total asset turnover of 0.43
● financial leverage of 1.9
Question 7.1: Tax burden
What is the firm’s tax burden?
Answer 7.1: 1 – 10% = 90%
(tax burden = complement of tax rate)
Question 7.2: Interest burden
What is the firm’s interest burden?
Answer 7.2: 1 – 1 / 6.2 = 83.87%
(interest burden = EBT / EBIT = (EBIT – interest expense) / EBIT = 1 – 1 / interest coverage ratio)
Question 7.3: Net profit margin
What is the firm’s net income margin (net profit margin)?
Answer 7.3: 42% × 90% × 83.87% = 31.70%
(net income margin = the EBIT margin × the interest burden × the tax burden)
Question 7.4: Return on assets
What is the firm’s return on assets?
Answer 7.4: 31.70% × 0.43 = 13.63%
(return on assets = net income margin × asset turnover ratio)
Question 7.5: Return on equity
What is the firm’s return on equity?
Answer 7.5: 13.63% × 1.9 = 25.90%
(return on equity = return on assets × financial leverage)
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