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

Answer 1

Answer:

10.23%

Explanation:

Calculation for What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant

First step is to calculate the Net income

.15 = Net income/ 375,000

Net income=.15($375,000)

Net income= $56,250

Now let calculate profit margin using this formula

Profit margin = Net Income/Sales

Let plug in the formula

Profit margin= $56,250/$550,000

Profit margin= 0.1023*100

Profit margin=10.23%

Therefore the profit margin that the firm would need in order to achieve the 15% ROE, holding everything else constant is 10.23%