Question

Young Enterprises reported the following information to shareholders at the end of last year:

Total Debt = $300,000

Total Assets = $675,000

Sales = $550,000

Net Income = $25,000.

The CEO wants to increase the ROE to 15% by reducing costs.  To reach this goal of ROE equal to 15%, what would be the firm's profit margin, all else remaining constant?

	a.	10.02%
	b.	12.58%
	c.	10.23%
	d.	8.59%
	e.	9.51%

Answer 1

Now We have following information

Total Debt = $300,000

Total Assets = $675,000

From this we can know that the Equity would be Total Assets - Total Debt = 675000 - 300000 = 375000

Now to achieve the ROE of 15 % they would have to have a (net income x / total equity) = 15%

(Formula for ROE = Net income/Total Equity)

x/ 375000 = 0.15

x = 0.15 * 375000

x= 56250

Thus to achieve the ROE of 15% the net income should be 56250 or should be increased by 31250

Thus with increased net income of 56250, we need to check the profit margin of the company. We have following information:

Sales = $550,000

Net Income = $25,000.

We know that profit margin = net income / total sales

Now for increased income the profit margin would be 56250 / 550000 = 0.1022727273 = 10.227% = 10.23%