Question

White Memorial Hospital has a total (profit) margin of 4.0 percent on revenues of $10 million. Its assets total $5 million and it uses $2 million total in debt financing. What is the hospital's return on equity (ROE)? (Hint: Use the Du Pont equation.)

              a.           13.3%

              b.           12.0%

              c.           10.3%

              d.           7.6%

              e.           5.3%

Answer 1

Answer:
Assets Turnover Ratio = Sales / Total Assets
Assets Turnover Ratio = $10,000,000 / $5,000,000
Assets Turnover Ratio = 2.0 times

Total Equity = Total Assets – Total Debt
Total Equity = $5,000,000 - $2,000,000
Total Equity = $3,000,000

Equity Multiplier = Total Assets / Total Equity
Equity Multiplier = $5,000,000 / $3,000,000
Equity Multiplier = 1.6667

Return on Equity (ROE) = Profit Margin * Assets Turnover Ratio * Equity Multiplier
Return on Equity (ROE) = 4.0% * 2.0 * 1.6667
Return on Equity (ROE) = 13.3%

Option a is Correct.