Question

A firm has a profit margin of 2.5% and an equity multiplier of 2.0. Its sales are $320 million, and it has total assets of $192 million. What is its ROE? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

ANSWER = 8.33%

Net profit margin = 2.5%

Equity multiplier = 2

Total sales = $320 million

Total assets = $192 million

$\dpi{100} \fn_cm \small Asset\, turnover = \frac{Sales}{Total\, assets}$

$\dpi{100} \fn_cm \small Asset\, turnover = \frac{320\, million}{192\, million}$

$\dpi{100} \fn_cm \small Asset\, turnover = 1.6666667$

$\dpi{100} \fn_cm ROE = Net\, profit\, margin \times Asset\, turnover \times Equity\, multiplier$

$\dpi{100} \fn_cm ROE = 2.5 \times 1.6666667 \times 2$

$\dpi{100} \fn_cm ROE = 8.33$