Question

Last year Randolph Company had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 45.0%. What was total assets turnover, what was equity multiplier, what was profit margin, and what was the ROE?

Answer 1

Answer:

13.82%

Explanation:

Data provided in the question:

Sales = $325,000

Net income = $19,000

Assets = $250,000

Total-debt-to-total-assets ratio = 45.0% = 0.45

Now,

Total asset turnover = Sales ÷ Total assets

= $325,000 ÷ $250,000

= 1.3

Profit margin = Net income ÷ Sales

= $19,000 ÷ $325,000

= 0.05846

Equity multiplier = 1 ÷ [ 1 - Debt to asset ratio]

= 1 ÷ [ 1 - 0.45 ]

= 1.818

thus,

ROE = Profit margin × Total asset turnover × Equity multiplier

= 0.05846 × 1.3 × 1.818

= 0.1382

or

= 0.1382 × 100%

= 13.82%