Question

A firm has a profit margin of 12 percent; total asset turnover of 0.55 and an equity multiplier of 2.2. What is the firm's ROA and ROE?

Answer 1

Answer:

ROA = 6.6%

ROE 14.52%

Explanation:

profit margin = net income / sale = 12%

assets turn over = sales / assets = 0.55

equity mutiplier = assets / equity = 2.2

ROE = return on equity = net income / equity

ROA = return on equity = net income / assets

we use the fraction properties to get ROE and ROA

$\frac{income}{sales} \times \frac{sales}{Assets} =\frac{income}{Assets} \\ 0.12 \times 0.55 = 0.066$

ROA = 6.6%

We apply the same property to get ROE

$\frac{income}{assets} \times \frac{assets}{equity} =\frac{income}{equity} \\ 0.066 \times 2.2 = 0.14252$

ROE = 14.52%