Question

Consider a firm with a net profit margin of 4.2%, a total asset turnover of 1.4,...

Consider a firm with a net profit margin of 4.2%, a total asset turnover of 1.4, total assets of $40 million, and a book value of equity of 20 million.

What is the firm’s current ROE?

If the firm increased its net profit margin to 5%, what should be its ROE?

What would be the effect of buying back 5 million of equity with new debt? What would be its new ROE?

Homework Answers

Answer #1

This is an application of Du Pont analysis, which breaks ROE into its constituent components to determine which of these components is most responsible for changes in ROE.

Mathematically,

ROE = Net Profit Margin * Asset Turnover ratio * Equity Multiplier

Where Equity Multiplier = Assets/Equity

No, in our question, if we substitute the values

Current ROE = 4.2% * 1.4 * (40/20) = 11.76%

Scenario 1: Now, assuming, net profit margin of company improves to 5%

ROE = 5% * 1.4 * (40/20) = 14%

Scenario 2: Now, assuming, company buys back $5 mil of equity using debt, the equity remaining = $15 mil (Assuming net profit margin stays at 4.2%)

ROE = 4.2% * 1.4 * (40/15) = 15.68%

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Consider a retail firm with a net profit margin of 3.74 %​, a total asset turnover...
Consider a retail firm with a net profit margin of 3.74 %​, a total asset turnover of 1.88​, total assets of $ 43.4 ​million, and a book value of equity of $ 18.3 million. a. What is the​ firm's current​ ROE? b. If the firm increased its net profit margin to 4.45 %​, what would be its​ ROE? c.​ If, in​ addition, the firm increased its revenues by 22 % ​(maintaining this higher profit margin and without changing its assets...
Consider a retail firm with a net profit margin of 3.35 %​, a total asset turnover...
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...
If we know that a firm has a net profit margin of 4.2%, total asset turnover...
If we know that a firm has a net profit margin of 4.2%, total asset turnover of 0.62, and a financial leverage multiplier of 1.37, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?
if we know that a firm has a net profit margin of 4.5%, total asset turnover...
if we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.24, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?
for an all equity firm with a total asset turnover of 1.6, what profit margin would...
for an all equity firm with a total asset turnover of 1.6, what profit margin would achieve a target ROE of 0.29? Conver the profit margin rate to a percent
One. The famous Dupont Identity breaks Return on Equity (ROE) into three components: Profit Margin, Total...
One. The famous Dupont Identity breaks Return on Equity (ROE) into three components: Profit Margin, Total Asset Turnover, and Financial Leverage (Assets/Equity). French Corp. has an Asset/Equity ratio of 1.55. Their current Total Asset Turnover has recently fallen to 1.20, bringing their ROE down to 9.1% a) What is this firm's Profit Margin? B) If the company were able to improve its Total Asset Turnover to 1.8, what would be their new ROE? Two. Sousa, Inc., has Sales of $37.3...
24. If a firm’s net profit margin is 10.1%, asset turnover is 1, and the debt...
24. If a firm’s net profit margin is 10.1%, asset turnover is 1, and the debt ratio is 0.78, what is the firm’s return on equity (ROE)? Round to the nearest 0.1%, drop the % symbol. E.g., if your answer is 25.74%, record it as 25.7.
Stroud Sporting Gear Inc. has a net profit margin of 9%, a total asset turnover of...
Stroud Sporting Gear Inc. has a net profit margin of 9%, a total asset turnover of 2.4, total assets of $225 million, and total equity of $120 million. What is the company’s return on equity?
Vintage, Inc. has a total asset turnover of 0.64 and a net profit margin of 3.23...
Vintage, Inc. has a total asset turnover of 0.64 and a net profit margin of 3.23 percent. The total assets to equity ratio for the firm is 2.0. Calculate Vintage’s return on equity.
Braam Fire Prevention Corp. has a profit margin of 9.70 percent, total asset turnover of 1.41,...
Braam Fire Prevention Corp. has a profit margin of 9.70 percent, total asset turnover of 1.41, and ROE of 18.75 percent. What is its firm's debt-equity ratio?