Question

Southwick Company has total assets of $40,000. It has a profit margin of 7.5 percent on sales of $100,000. If the equity multiplier is 1.9, what is its ROE?

27.6%

17.5%

31.5%

35.6%

20.6%

24.0%

Answer 1

Ans.	Option   4th   35.6%
	Calculations for Total equity :
	Equity multiplier = Total assets / Total equity
	1.9 = $40,000 / Total equity
	Total equity = $40,000 / 1.9
	$21,052.63
	Calculations for Net income :
	Net income = Sales * Profit margin
	$100,000 * 7.50%
	$7,500
	Return on equity (ROE)   = Net income / Total equity * 100
	$7,500 / $21052.63 * 100
	35.6%