Final answer:
To calculate the firm's Return on Assets (ROA), start by calculating the net profit before interest and taxes using the firm's profit margin and sales revenue.
Then, subtract the after-tax interest cost on the debt from this figure. Finally, divide the net income by the total assets to determine the ROA, which is 11.67% for this firm.
Step-by-step explanation:
To calculate the firm's Return on Assets (ROA), we must first determine the firm's net income. With a profit margin of 15 percent on sales of $20,000,000, the firm's net profit before interest and tax can be calculated as follows:
- Sales Revenue = $20,000,000
- Profit Margin = 15%
- Net Profit Before Interest and Tax = Sales Revenue x Profit Margin
- Net Profit Before Interest and Tax = $20,000,000 x 15% = $3,000,000
Next, we need to account for the after-tax interest cost on the firm's debt, which is given as 5% on a debt of $7,500,000:
- Total Debt = $7,500,000
- Interest Rate = 5%
- Interest Cost = Total Debt x Interest Rate
- Interest Cost = $7,500,000 x 5% = $375,000
The firm's net income after interest is net profit before interest and tax minus the interest cost:
- Net Income = Net Profit Before Interest and Tax - Interest Cost
- Net Income = $3,000,000 - $375,000 = $2,625,000
Finally, we can calculate the ROA by dividing the net income by the total assets:
- Total Assets = $22,500,000
- ROA = Net Income / Total Assets
- ROA = $2,625,000 / $22,500,000
- ROA = 11.67%
The firm's ROA is therefore 11.67%.