(Learning Objective 5: Compute and explain return on assets and return on equity) Give the DuPont model formula for computing (a) rate of return on total assets (ROA) and (b) rate of return on common stockholders’ equity (ROE). Then answer these questions about the rate-of-return computations.
1. Explain the meaning of the component driver ratios in the computation of ROA.
2. What impact does the leverage ratio have on ROA?
3. Under what circumstances will ROE be higher than ROA? Under what circumstances would ROE be lower than ROA?