Question

A firm has a profit margin of 6% and an equity multiplier of 1.5. Its sales are $230 million, and it has total assets of $115 million. What is its ROE? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

18%

Step-by-step explanation:

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

ROE = Profit margin × Total assets turnover × Equity multiplier

ROE = 6% × 2 × 1.5

= 18%

The total assets turnover is shown below:

= Sales ÷ total assets

= $230 million ÷ $115 million

= 2

Simply we apply the ROE formula in which the profit margin is multiplied with the total assets turnover and the equity multiplier