Question

Consider a retail firm with a net profit margin of 3.42 %​, a total asset turnover of 1.88​, total assets of $ 45.9 ​million, and a book value of equity of $ 18.6 million. a. What is the​ firm's current​ ROE? b. If the firm increased its net profit margin to 4.19 %​, what would be its​ ROE?

Answer 1

Answer:

The answer is a. $15.88%

                       b. 19.46%

Explanation:

a.   Equity multiplier =  total assets /shareholders equity

     Equity multiplier = $ 45.9 ​million/  $ 18.6 million= 2.47

ROE = net profit *  asset turnover * Equity multiplier

ROE = 3.42% * 1.88​ * 2.47=  $15.88%

b. ROE = net profit *  asset turnover * Equity multiplier

    ROE = 4.19 %​ * 1.88​ * 2.47 = 19.46%