CFA Level 1: Calculating ROE and Financial Leverage

Calculating ROE and Financial Leverage

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Question

A firm has a net profit margin of 25%. Its total asset turnover equals 1.3 and equity turnover equals 2.1. The firm's ROE and financial leverage equal ________.

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Explanations

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A. B. C. D.

C

ROE = net income/equity = (net income/sales)*(sales/equity) = net profit margin * equity turnover = 25%*2.1 = 52.5% Financial Leverage = Total assets/equity =

(total assets/sales)*(sales/equity) = (1/asset turnover)*(equity turnover) = 2.1/1.3 = 1.62.

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