Question

Exercise 6 (15 min - 10 points) The Furniture Barn has a profit margin of 8.7 percent, a return on assets of 116 percent, and an equity multiplier of 1.87. What is the return on equity?

Answer 1

The correct answer is return on equity = 21.692%

Explanation and calculations

Return on Equity = Return on Assets * Equity Multiplier

= 11.6%*1.87

= 21.692 %

Thus the correct answer = 21.692 %

Explanation

Return on assets = profit/ total assets or

Total assets = Profit / Return on Assets

Equity Multiplier = total assets / Equity

Equity Multiplier * Equity = Total assets

Now by equating both the equations

Profit/ Return on assets = Equity Multiplier * Equity

Profit/11.6% = 1.87* Equity

Profit/ Equity = 1.87*11.6%

Return on equity = 21.692%