Question

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $550,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

Answer 1

Given for Chang Corp.

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $550,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%.

So, firms equity = assets = $375000

Since ROE = 15%

So, Net income/equity = 15%

or Net income = 15% * 375000 = $56250

So, profit margin = Net income / sales = 56250/550000 = 10.23%

So required profit margin = 10.23%