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13 May, 16:41

LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. 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 LeCompte need in order to achieve the 15% ROE, holding everything else constant?

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  1. 13 May, 17:53
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    The profit margin will need to be of 7.57%

    Explanation:

    the profit margin is the ratio between net income and sales

    net income / sales = profit margin

    We are asked for the profit margin at which ROE = 15%

    ROE return on equity

    ROE = net income / equity

    This company has zero debt, so equity = assets = 312,900

    Desired ROE = 15%

    net income / equity = 15%

    net income / 312,900 = 15%

    312,900 x 15% = net income

    target net income = 46,935

    target profit margin

    target net income / sales

    46,935/620,000 = 0,07570161 = 7.57%
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