Which one of the following will increase the return on equity as computed using the Du Pont identity given that all else is held constant?
A) A decrease in total equity
B) A decrease in sales
C) A decrease in net income
D) An increase in total assets
E) An increase in costs

Question

Quizplus · Accepted Answer

A decrease in total equity increases the return on equity (ROE) by increasing the equity multiplier component of the Du Pont identity, assuming net income remains constant. This is because ROE is calculated as net income divided by shareholder's equity; thus, a decrease in equity, with constant net income, results in a higher ROE.

Which One of the Following Will Increase the Return on Equity