Question

Chang Corp has $975,000 of assets, and it uses only common equity capltal (zero debt). Its sales last year were $795,000. Stockholders recently voted in a new board of directors that has promised to lower costs and get the return on equity up to 7.0%. What profit margin would the firm need in order to achieve the 7% ROE, holding everything else constant? Hint: Use the DuPont Equation, seting BVE = $975,000.

Answer 1

Dupont Equation:

ROE = (Net Profit / Sales ) * (Sales / Assets) * ( Assets / Equity )

ROE = Net Profit Margin * (Sales / Assets) * ( Assets / Equity )

0.07 = Net Profit Margin * ($ 795000 / $ 975000) * ( $ 975000 / $ 975000)

0.07 = Net Profit Margin * 0.8154 * 1

0.07 = Net Profit Margin * 0.8154

Net Profit Margin = 0.07/ 0.8154

Net Profit Margin = 0.8485 i.e., 8.485 %

Notes :

Assets = Equity . as there is no debt

Sales = $ 795000 (Given)

Assets = $ 97500 (Given)

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