Question

Carter, Inc., a manufacturer of electrical supplies, has an ROE of 23.1 percent, a profit margin of 3.30 percent, and a total asset turnover ratio of 1.60 times. Its peer group also has an ROE of 23.1 percent but has out performed Carter with a net profit margin of 3.59 percent and a total assets turnover ratio of 2 times. Calculate the Carter's equity multiplier and peer group equity multiplier.

Answer 1

Answer:

The Carter's equity multiplier and peer group equity multiplier is 4.375 and 3.21 respectively.

Explanation:

For computing the Return on equity based on equity multiplies the following formula is used which is shown below:

Return on Equity = Net Profit margin × Total assets turnover × Equity multiplier

Since ROE, profit margin and Total assets turnover ratio is given. The Equity multiplier can be easily calculated.

Carter equity multiplier = Return on Equity ÷ (profit margin and Total assets turnover ratio)

= 23.1% ÷ (3.30% × 1.60 times)

= 4.375

Peer group equity multiplier = Return on Equity ÷ (profit margin and Total assets turnover ratio)

= 23.1% ÷ (3.59% × 2 times)

= 3.21

Hence, the Carter's equity multiplier and peer group equity multiplier is 4.375 and 3.21 respectively.