Question

Consider a retailing firm with a net profit margin of 3.1%​, a total asset turnover of 1.75​, total assets of $43.1 ​million, and a book value of equity of $18.1 million.What is the firm's current​ ROE?

Answer 1

The firm's current ROE is calculated by the formula: ROE = Net Profit Margin * Total Asset Turnover * Equity Multiplier. With values provided, the ROE is approximately 12.92%.

Step-by-step explanation:

The return on equity (ROE) of the firm is found by multiplying the net profit margin by the total asset turnover and then by the equity multiplier (equity multiplier = Total Assets / Book Value of Equity). The calculation goes as follows:

Net profit margin = 3.1%
Total asset turnover = 1.75
Total assets = $43.1 million
Book value of equity = $18.1 million

First, we find the equity multiplier:

Equity Multiplier = Total Assets / Book Value of Equity = $43.1 million / $18.1 million = 2.38

Then we calculate ROE:

ROE = Net Profit Margin * Total Asset Turnover * Equity Multiplier = 3.1% * 1.75 * 2.38 = 12.9235%

Therefore, the firm's current ROE is approximately 12.92%.