Net Income

What is the net income of a firm that has a return on equity of 12%, a leverage ratio of 1.5, an asset turnover of 2, and revenue of $1 million? A) $36,000. B) $360,000. C) $40,000. D) $400,000.

0.12 = 1.5*2*(NI/1000000) NI = 40,000

Is this part of DuPont? I don’t have a firm grasp of that yet.

what study session is this question from?

yes, it is DuPont. and C is the answer

Like map1 said, it is DuPont. You derive net income from the net profit margin component of the 3-factor decomposition.

ROE = (NI/revenue) (revenue/asset) (asset/equity) 12% =(NI/1million) (2) (1.5) NI = 1million*4% = 40000

Too easy. C is correct.

Know these relationships cold. They will make FSA so much easier. Check the Schweser quick sheet. They are all there in front of you.

has anybody seen questions about the extended dupont method? Its something that i’ve have studied, but don’t recall having any questions on it. My only source of questions is the QBank, for those who have done Stalla and the CFAI mock/sample has there been questions on it?

Try this one looks like extended i will post a new tread check out now

C Do the ROE = AT * PM * leverage equation and you will see that net income is missing from the PM part. Back into it. I just plugged 400,000 and 40,000 and solved like that. This is one that asks you to test ROE by giving you ROE and seeing if you know the components cold.