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Most investors and analysts in the financial community pay particular attention to a company's ROE. The ROE can be calculated simply by dividing a firm's
Most investors and analysts in the financial community pay particular attention to a company's ROE. The ROE can be calculated simply by dividing a firm's net income by the firm's shareholder's equity, and it can be subdivided into the key factors that drive the ROE. Investors and analysts focus on these drivers to develop a clearer picture of what is happening within a company. An analyst gathered the following data and calculated the various terms of the DuPont equation for three companies: Company A Company B Company C ROE Profit Margin x Total Assets Turnover x Equity Multiplier 12.0% 15.5% 21.5% 57.3% 58.2% 58.0% 9.8 10.2 10.3 2.14 2.61 3.60 Referring to these data, which of the following conclusions will be true about the companies' ROEs? O The main driver of company A's inferior ROE, as compared to that of company B's and company C's ROE, is its use of higher debt financing 0 The main driver of company C's superior ROE, as compared to that of company A's and company B's ROE, is its greater use of debt financing. O The main driver of company C's superior ROE, as compared to that of company A's and company B's ROE, is its efficient use of assets
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