Question

Problem 19-14 A firm has a tax burden ratio of 0.6, a leverage ratio of 155, an interest burden of 0.7 and a return on sales of 15%. The firm generates $210 in sales per dollar of assets What is the firm's ROE? (Do not round intermediate calculations. Round your answer to 2 decimal places.) ROE %

Answer 1

Tax burden ratio Net income EBT = 0.60 Interest burden ratio = EBT / EBIT 0.70 Return on sales = EBIT / Sales 15% $2.10/$1 2.10 Times Total assets turnover ratio Sales /Assets Leverage ratio 1.55 Profit margin ratio = Net income / Sales Tax burden ratio * Interest burden ratio * Return on sales = 0.60 * 0.70 15% Net income / EBT * EBT / EBIT * EBIT / Sales 6.3% Net income Sales 6.3% Profit margin ratio = Net income / Sales 6.3% ROE as per dupont basis Profit margin ratio* Total assets turnover ratio * Leverage ratio - 6.3%* 2.10 * 1.55 = 20.5065% = 20.51 % (Rounded) Ans ROE= 20.51 %