Which one of the following is a correct formula for computing the return on equity?
A) Profit margin × ROA
B) ROA × Equity multiplier
C) Profit margin × Total asset turnover × Debt-equity ratio
D) Net income/Total assets
E) Debt-equity ratio × ROA

Question

Which one of the following is a correct formula for computing the return on equity? 
A) Profit margin × ROA
B) ROA × Equity multiplier
C) Profit margin × Total asset turnover × Debt-equity ratio
D) Net income/Total assets
E) Debt-equity ratio × ROA

Quizplus · Accepted Answer

The correct formula for computing the return on equity is ROA × Equity multiplier. This is because Return on Equity (ROE) is a ratio of net income to equity capital, and it can be broken down using the DuPont Equation as ROE = (Net income / Sales) × (Sales / Total assets) × (Total assets / Equity capital), which simplifies to ROE = ROA × Equity multiplier. Option B provides this correct formula. The other options provide formulas for other financial ratios.

Which One of the Following Is a Correct Formula for Computing