Question

Calculate the ROE using the Strategic Profit Model for a company with the following data: Profit margin = 12% Total asset turnover = 1.4 Inventory turnover = 0.7 Equity multiplier = 1.3 Current ratio = 1.1

Answer 1

Answer:

≅ 21.8%

Explanation:

The Return on Equity can be calculated by ,

ROE = Net Profit Margin × Return asset × Financial leverage

Net profit margin = Profit margin = 12%

Return Asset = Total Asset turnover = 1.4

Financial leverage = Equity Multiplier = 1.3

Therefore,

ROE = 12 × 1.4 × 1.3

       = 21.84% .