Question

Lee Suns has sales of $3,850, total assets of $3,550, and a profit margin of 4 percent. The firm has a total debt ratio of 40 percent. What is the return on equity? Mutiple Choice 7.23 percent 3.85 percent 4.34 percent 13.83 percent 4.00 perce
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Answer #1

Answer: 1st option

Return on equity = (Net income / Average equity) × 100

Net income = Sales × Profit margin

                   = $3,850 × 4%

                   = $154

Average equity = Total assets × (1 – Debt ratio)

                        = $3,550 × (1 – 0.40)

                        = $3,550 × 0.60

                        = $2,130

Return on equity = (Net income / Average equity) × 100

                            = ($154 / $2,130) × 100

                            = 7.23%

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