In the extended DuPont equation, a firm’s Return on Equity (ROE) reflects various components that contribute to its financial performance. The extended DuPont equation can be expressed as:
ROE= (Net profit Margin ) multiply ( Asset Turnover)
a) Explain each component of the extended DuPont equation, including Net Profit Margin, Asset Turnover, and Equity Multiplier.
b) Discuss how a firm’s use of debt financing, or leverage, is reflected in its ROE according to the extended DuPont equation.
c) Analyze how changes in each component can impact the overall ROE.
d) Provide a numerical example to illustrate the calculation of ROE using the extended DuPont equation.