Question

Consider a retail firm with a net profit margin of 3.35 %​, a total asset turnover of 1.79​, total assets of $ 43.1 ​million, and a book value of equity of $ 17.5 million. a. What is the​ firm's current​ ROE? b. If the firm increased its net profit margin to 4.08 %​, what would be its​ ROE? c.​ If, in​ addition, the firm increased its revenues by 25 % ​(maintaining this higher profit margin and without changing its assets or​ liabilities), what would be its​ ROE?

Answer 1

A)ROE = Net profit margin * Total asset turnover *(Total asset /total equity)

             = 3.35 * 1.79*(43.1/17.5)

             = 3.35*1.79* 2.46286

             = 14.77%

B)ROE = 4.08*1.79*2.46286

            = 17.99%

C)ROE = 4.08 * (1.79*1.25)*2.46286

           = 4.08* 2.2375*2.46286

           = 22.48%