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? Do not round your intermediate calculations.

Answer 1

Answer:

10.22%

Explanation:

Data provided in the question:

Assets of Chang corp. = $375,000

Sales = $550,000

Net income = $25,000

Net Income required at 15% ROE = 15% × $375,000

= $56,250

Therefore,

The profit margin = $\frac{\textup{Net income}}{\textup{Total sales}}\times100\%$

or

The profit margin = $\frac{\textup{56,250}}{\textup{550,000}}\times100\%$

or

The profit margin = 10.22%

Answer 2

Answer:

Profit Margin = 10.227%

Explanation:

Given:

Total Assets = $375,000(Common equity)

Sales = $550,000

Net Income = $25,000

Return on equity = 15% = 15/100 = 0.15

Profit margin = ?

Computation of profit margin:

Profit margin = (Common Equity × Return on equity) / Sales

Profit Margin = ($375,000 x 0.15) / $550,000

Profit Margin = ($56,250) / $550,000

= 0.102272

Profit Margin = 10.227% (approx)