Question

With sales of $269,687, total assets of $144,234, profit margin of 5%, and equity multiplier of 1.3, what would be the ROE? Convert the profit margin rate to a percent and report it to the nearest hundredth as in xx.xx % but not entering the percent sign. You would need to calculate the rate to four places before multiplying by 100 to convert to a percent.

Answer 1

Solution :

As per the DuPont Equation, the Return on Equity is calculated as follows :

Return on Equity = Equity multiplier * Total asset turnover * Profit margin

As per the information given in the question we have

Equity multiplier = 1.3 ;    Profit margin = 5 % = 0.0500

Sales = $ 269,687 ;    Total Assets = $ 144,234   ;

We know that Total assets turnover = Sales / Total Assets

Applying the information available we have the Total assets turnover as

= $ 269,687 / $ 144,234 = 1.869788 times

= 1.87 times ( when rounded off to two decimal places )

Applying the available values in the DuPont equation we have

ROE = 1.3 * 1.87 * 0.0500

= 0.121550

= 0.1216 ( when rounded off to four decimal places )

= 12.16 % ( when converted to a percent ) [ 0.1216 * 100 ]

The ROE = 12.16 %