Question

Firm Galliher has total assets of $3 million, a total debt ratio of 30%, and an after-tax profit margin of 11.04% and sales of 2.5 million. What is the firm’s return on equity?

	a.	35%
	b.	13%
	c.	none of the above
	d.	5%
	e.	27%

Answer 1

Total assets = $3,000,000

Total debt ratio = 30%

After tax profit margin = 11.04%

Sales = $2,500,000

Return on equity = ?

Total debt ratio = Total liabilities/Total assets

30% = Total liabilities/3,000,000

Total liabilities = 3,000,000 x 30%

= $900,000

Equity = Total assets - Total liabilities

= 3,000,000 - 900,000

= $2,100,000

After tax profit margin = After tax profit/Sales

11.04% = After tax profit/2,500,000

After tax profit = 2,500,000 x 11.04%

= $276,000

Return on Equity = After tax profit/Equity

= 276,000/2,100,000

= 13%

Hence, correct option is (b)