Using the DuPont system of analysis and holding other factors constant, an increase in financial leverage will result in ________ in the return on equity.
A) an increase
B) a decrease
C) no change
D) an undetermined change

Question

Quizplus · Accepted Answer

The DuPont system of analysis states that return on equity (ROE) is calculated as the product of net profit margin, asset turnover, and financial leverage. Holding other factors constant, an increase in financial leverage (i.e., an increase in debt) increases the denominator (total equity), which increases the ROE. Therefore, the answer is A) an increase in the return on equity.

Using the DuPont System of Analysis and Holding Other Factors