Question

Consider a retail firm with a net profit margin of 3.74 %​, a total asset turnover of 1.88​, total assets of $ 43.4 ​million, and a book value of equity of $ 18.3 million. a. What is the​ firm's current​ ROE? b. If the firm increased its net profit margin to 4.45 %​, what would be its​ ROE? c.​ If, in​ addition, the firm increased its revenues by 22 % ​(maintaining this higher profit margin and without changing its assets or​ liabilities), what would be its​ ROE?

Answer 1

From the given data, the calculations are as follows:

a) Return on Equity = Net Profit Margin × Total Asset Turnover × (Total assets ÷ Book value of equity)

ROE = 3.74 × 1.88 × (43.4 million ÷ 18.3 million)

ROE = 7.03 × 2.37

ROE = 16.66%

b) When the net profit margin increases to 4.45%

ROE = 4.45 × 1.88 × (43.4 million ÷ 18.3 million)

ROE = 8.366 × 2.37

ROE = 19.83%

c) When the increase in the revenue is by 22%

ROE = 4.45 × (1.88 × 1.22) × (43.4million ÷ 18.3 million)

ROE = 10.20 × 2.37

ROE = 24.174%