FA Mod 7 DuPont analysis reverse practice exam questions


FA Mod 7 DuPont analysis reverse practice exam questions

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NEAS
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FA Module 7 DuPont analysis reverse practice exam questions

(The attached PDF file has better formatting.)

A firm has

●    an effective tax rate of 10%
●    an interest coverage ratio of 6.2
●    an EBIT (earnings before interest and taxes) margin of 42%
●    total asset turnover of 0.43
●    financial leverage of 1.9

Question 7.1: Tax burden

What is the firm’s tax burden?

Answer 7.1: 1 – 10% = 90%

(tax burden = complement of tax rate)


Question 7.2: Interest burden

What is the firm’s interest burden?

Answer 7.2: 1 – 1 / 6.2 = 83.87%

(interest burden = EBT / EBIT = (EBIT – interest expense) / EBIT = 1 – 1 / interest coverage ratio)


Question 7.3: Net profit margin

What is the firm’s net income margin (net profit margin)?

Answer 7.3: 42% × 90% × 83.87% = 31.70%

(net income margin = the EBIT margin × the interest burden × the tax burden)


Question 7.4: Return on assets

What is the firm’s return on assets?

Answer 7.4: 31.70% × 0.43 = 13.63%

(return on assets = net income margin × asset turnover ratio)


Question 7.5: Return on equity

What is the firm’s return on equity?

Answer 7.5: 13.63% × 1.9 = 25.90%

(return on equity = return on assets × financial leverage)


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