Question

Third Rock Ventures sells all its merchandise on credit. It has a profit margin of 8%, days sales outstanding were 60 days based on 360 days in a year, receivables of R180 000, total assets of R4000 000, and a debt ratio of 0,75. What is the company's return on equity (ROE)?

Answer 1

Explanation:

First, we need to calculate the company's credit sales for the year:

Credit Sales = Receivables / (Days Sales Outstanding / 360)

Credit Sales = R180,000 / (60/360) = R1,080,000

Next, we need to calculate the company's net income:

Net Income = Profit Margin x Credit Sales

Net Income = 0.08 x R1,080,000 = R86,400

We can calculate the company's total equity as follows:

Total Equity = Total Assets x (1 - Debt Ratio)

Total Equity = R4,000,000 x (1 - 0.75) = R1,000,000

Finally, we can calculate the ROE:

ROE = Net Income / Total Equity

ROE = R86,400 / R1,000,000 = 0.0864 or 8.64%

Therefore, Third Rock Ventures' return on equity is 8.64%.