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

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Parrain Parrain · Answer 1 · 2020-09-17T03:34:58+02:00

Answer:

a. 15.62%

b. 17.79%

c. 21.53%

Explanation:

a. The Dupont formula for calculating Return on Equity is useful here;

ROE = Net Profit margin * Asset Turnover * Assets / Equity

ROE = 3.6% * 1.88 * ( 43.4/18.8)

ROE = 15.62%

b. ROE = Net Profit margin * Asset Turnover * Assets / Equity

= 4.1% * 1.88 * ( 43.4/18.8)

= 17.79%

c. As a result of the increase in revenues, the asset turnover will increase by;

= Asset turnover * ( 1 + increase in revenue)

= 1.88 ( 1 + 21%)

= 2.2748‬

ROE = 4.1% * 2.2748 * ( 43.4/18.8)

= 21.53%