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19 October, 01:03

Consider a retailing firm with a net profit margin of 3.6 % , a total asset turnover of 1.74 , total assets of $ 44.4 million, and a book value of equity of $ 18.4 million. a. What is the firm's current ROE? b. If the firm increased its net profit margin to 4.1 % , what would be its ROE? c. If, in addition, the firm increased its revenues by 23 % (while maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE?

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  1. 19 October, 01:57
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    a. 15.09624%

    b. 17.19294%

    c. 18.56837%

    Explanation:

    In this question, we use the DuPont formula which is shown below:

    a. Return on equity = Net profit margin * total assets turnover * leverage factor

    where,

    leverage factor = Total assets : book value of equity

    = $44.4 million : $18.4 million

    = 2.41

    Now the ROE equals to

    = 3.6% * 1.74 * 2.41

    = 15.09624%

    b. If net profit margin is 4.1%, so the New ROE equals to

    = 4.1% * 1.74 * 2.41

    = 17.19294%

    c. If revenue is increase by 23%, so it increase the asset turnover, and the new asset turnover equals to

    = 1.74 * 123%

    = 2.1402

    Now, New ROE equals to

    = 3.6% * 2.1402 * 2.41

    = 18.56837%
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