Question

What is a firm’s ROA if its operating margin is 31.6%, interest expense is 2.5% of sales, asset turnover is 1.8, and its tax rate is 20%? Round to the nearest 0.1%

Answer 1

- Operating Margin = 31.6%

Operating Margin = Operating Income or EBIT/Net Sales, so we can say that Operating Income is 31.6% of Sales.

& Interest Expenses is 2.5% of Sales

Thus, Pre-Tax Income (which is Operating Income - Interest Expenses) will be 29.1% of Sales (31.6% - 2.5%)

Let Net sales be X.

Pre-Tax Income = 29.1% of X

= 0.291X

Net income after Tax = Pre-tax Income*(1-Tax rate)

= 0.291X*(1-0.20)

Net income = 0.2328X

Formula for: Asset Turnover = Net Sales/Total Assets

1.8 = X/Total Assets

Total Assets = X/1.8

Return on Assets(ROA) = Net income/Total Assets

ROA = 0.41904 or 41.904%

So, Return on Assets is 41.9%

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