Extended Dupont - Interest expense rate

[dea_cfa]

When we are given the interest expense rate, we can use that number in the equation yet when we are given interest expense as a dollar amount, we need to divide it by total assets? Intuitively, I would have assumed debt would have been in the denominator.
The question is, since when does interest expense dollars over total assets represent an interest expense rate? I understand that from an algebra standpoint assets need to be in the denominator but logically it is not jiving.
From Schweser:
Osnat Enterprise had the following financial data:
Operating profit margin 10%
Current ratio 2.5
Total asset turnover 2.4
Interest expense rate 6%
Leverage multiplier 2.0
Tax retention rate 0.80
What is Osnat’s return on equity?
A) 28.8%.
B) 13.0%
C) 14.4%
D) 15.0%
Your answer: A was correct!
ROE = [(10% × 2.4) - 6%] × (2.0)(0.80) = 28.8%
Thanks and I hope everyone is enjoying their day off from work as much as I am

 

[jabroni]

Good question.
Not sure if this helps, but try thinking of it this way:
With the extended dupont equation you’re trying to account for the effect of financial leverage.
The first part of the equation gives you operating profit (EBIT) as a percentage of total assets. You are now subtracting something from this. Something that accounts for interest expense. Since your profit is expressed as a percentage of total assets, one should be consistent and express interest as a percentage of total assets too.
Not sure if that helps or not.
Not the most technical of answers but tried to approach it intuitively. Good luck with your studies.

 

[dea_cfa]

“one should be consistent and express interest as a percentage of total assets too”
Thanks jabroni…I’ve noticed that understanding the deconstruction of ROE is the critical element in answering Dupont questions in lieu of memorization.