Question

Needham Pharmaceuticals has a profit margin of 6% and an equity multiplier of 2.1. Its sales are $110 million and it has total assets of $48 million.

What is its Return on Equity (ROE)? Round your answer to two decimal places.

Answer 1

Solution:
	Return on equity	28.88	%
Working Notes:
	Profit margin = Net income / Sales
	6% = Net income / 110,000,000
	Net Income = 6% x 110,000,000
	Net Income = $6,600,000
	Total asset turnover = Sales / Total assets
	=$110,000,000/$48,000,000
	Equity multiplier = Total assets / Total equity
	=2.1
	Using the DuPont identity to calculate ROE
	Return on Equity (ROE) = (Profit margin)(total asset turnover)(Equity multiplier)
	ROE = (Net income / Sales)(Sales / total assets)(Equity multiplier)
	ROE=($6,600,000/$110,000,000)($110,000,000/$48,000,000)(2.1)
	ROE=0.28875
	ROE=28.75 %
	ROE=28.88 %
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