Question

Consider a retail firm with a net profit margin of 3.14%, a total asset turnover of 1.87, total assets of $45.2 million, a. What is the firm's current ROE? b. If the firm increased its net profit margin to 3.82%, what would be its ROE? C. If, in addition, the firm increased its revenues by 16% (maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE? a. What is the firm's current ROE? The firm's current ROE is.%. (Round to one decimal place.)

Answer 1

(a)-Firms Current ROE

ROE = Net Profit Margin x Total Asset Turnover x (Total Assets / Equity)

= 3.14% x 1.87 Times x ($45.2 Million / $18.4 Million)

= 14.4%

(b)-ROE if the Net Profit Margin Increased to 3.82%

ROE = Net Profit Margin x Total Asset Turnover x (Total Assets / Equity)

= 3.82% x 1.87 Times x ($45.2 Million / $18.4 Million)

= 17.5%

(c)-ROE if the Revenue Increased by 16%

ROE = Net Profit Margin x (Total Asset Turnover x 116%) x (Total Assets / Equity)

= 3.82% x (1.87 Times x 116%) x ($45.2 Million / $18.4 Million)

= 20.4%