The DuPont Identity
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Questions and Answers

Which factors can lead to a higher return on equity according to the DuPont Identity?

  • Low profit margin
  • High margins (correct)
  • Low leverage
  • Inefficient use of assets

    • What is the DuPont Identity?

  • A tool for understanding a firm's return on equity (correct)
  • A company that popularized the DuPont Identity
  • A financial manager's role
  • A measure of leverage

    • How can the DuPont Identity be used to gain a clear sense of a firm's financial picture?

  • By decomposing ROE into its drivers (correct)
  • By understanding the sources of profit margin
  • By multiplying ROE by (sales/sales)
  • By rearranging the terms in the equation

    • What does the DuPont Identity express return on equity as?

    <p>The product of profit margin, asset turnover, and leverage</p> Signup and view all the answers

    What is the first step in understanding the DuPont Identity?

    <p>Multiplying ROE by (sales/sales)</p> Signup and view all the answers

    Which financial statement provides a measure of the firm's profit over a given time period?

    <p>Income statement</p> Signup and view all the answers

    Why does net income not correspond to cash earned?

    <p>Because certain uses and sources of cash are not reported on the income statement</p> Signup and view all the answers

    What are examples of non-cash entries on the income statement?

    <p>Depreciation and amortization</p> Signup and view all the answers

    What does the statement of cash flows determine?

    <p>How cash has been allocated during a set period</p> Signup and view all the answers

    Why is cash important for a firm?

    <p>It is needed to pay bills and maintain operations</p> Signup and view all the answers

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