Answer: has a lower net profit margin than Company 1.

## Explanation We can analyze this using the DuPont decomposition formula: **ROE = Net Profit Margin × Asset Turnover × Financial Leverage** Where: - **ROE** = Return on Equity - **Net Profit Margin** = Net Income / Revenue - **Asset Turnover** = Revenue / Average Total Assets - **Financial Leverage** = Average Total Assets / Average Shareholders' Equity **Given data:** - Company 1: ROE = 12%, Leverage = 2, Asset Turnover = 1 - Company 2: ROE = 18%, Leverage = 3, Asset Turnover = 2 **Step 1: Calculate ROA for both companies** ROA = Net Income / Average Total Assets = Net Profit Margin × Asset Turnover From DuPont: ROE = ROA × Financial Leverage So, ROA = ROE / Financial Leverage - Company 1 ROA = 12% / 2 = 6% - Company 2 ROA = 18% / 3 = 6% **Step 2: Calculate Net Profit Margin for both companies** Net Profit Margin = ROA / Asset Turnover - Company 1 Net Profit Margin = 6% / 1 = 6% - Company 2 Net Profit Margin = 6% / 2 = 3% **Step 3: Evaluate each option:** **A. Company 2 is less efficient than Company 1.** - **Incorrect.** Company 2 has higher asset turnover (2 vs 1), meaning it generates more revenue per dollar of assets, which indicates higher efficiency. **B. Company 2 has a higher ROA than Company 1.** - **Incorrect.** Both companies have the same ROA of 6%. **C. Company 2 has a lower net profit margin than Company 1.** - **Correct.** Company 2 has a net profit margin of 3% compared to Company 1's 6%. **Key insights:** - Company 2 achieves higher ROE (18% vs 12%) through a combination of: 1. Higher financial leverage (3× vs 2×) 2. Higher asset turnover (2× vs 1×) 3. But lower net profit margin (3% vs 6%) - This is a classic trade-off in business strategy: Company 2 operates on thinner margins but generates more volume and uses more leverage.

Author: LeetQuiz .