Question

Klondike Inc. has the financial characteristics bulleted below:

• Profit margin = 4 percent
• Days sales outstanding = 60 days
• Receivables = $150,000
• Total assets = $3 million
• Debt ratio = 0.64

Assuming Klondike sells all of its merchandise on credit, its return on equity (ROE) is closest to:

	a.	​3.3%.
	b.	​71.0%.
	c.	​33.3%.

Answer 1

The ROE is computed as shown below:

Sales is computed as follows:

= 365 / Number of days outstanding x Receivables

= 365 / 60 x $ 150,000

= $ 912,500

Net income is computed as follows:

Profit margin = Net income / Sales

Net income = 0.04 x $ 912,500

= $ 36,500

Total debt is computed as follows:

Total Debt = Debt ratio x Total Assets

Total debt = 0.64 x $ 3,000,000

= $ 1,920,000

Total equity is computed as follows:

= Total Assets - Total Debt

= $ 3,000,000 - $ 1,920,000

= $1,080,000

So, ROE will be computed as follows:

= $ 36,500 / $ 1,080,000

= 3.3% Approximately

So, the correct answer is option a.

Feel free to ask in case of any query relating to this question