Question

Problem 3-21 Profit Margin [LO4]

In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $4 to go buy $100 worth of groceries, then your child makes twice as much on the trip as we do.” You’ve collected the following information from the grocery chain’s financial statements:

   

(millions)
Sales	$	640.0
Net income		12.8
Total assets		370.0
Total debt		240.0

  

What is the profit margin for child as a percentage of what they spend and the profit margin for the store? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

	Profit margin
Child	%
Store	%

  

What is the store's ROE? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

ROE

%

Answer 1

1) Profit margin of the Child and Store -

a) Profit margin of the child:

Profit margin = ($4/$100)*100 = 4%

b) Profit margin of the store:

Profit margin = ($12.8m/$640m)*100 = 2%

Particulars	Profit margin
Child	2%
Store	4%

2) Return On Equity (ROE) for the store

Net income is given, but Shareholders' Equity is not directly given. First find out Shareholders' Equity.

Shareholders' Equity = $370m-$240m

Shareholders' Equity = $ 130m

ROE = ($12.8m/$130m)*100

ROE = 9.85%