Question

Denver, Inc., has sales of $14.2 million, total assets of $11.3 million, and total debt of $4.9 million. If the profit margin is 5 percent, the ROE is 12.09%.

A. True
B. False

Answer 1

The ROE calculation indicates that the statement is false. Correct option is B.

Step-by-step explanation:

The question asks whether the statement is true or false based on the given information. To determine this, let's calculate the ROE (Return on Equity) using the formula ROE = Profit Margin x Total Asset Turnover x Equity Multiplier. Given that the profit margin is 5% and the ROE is 12.09%, it implies that the Equity Multiplier is 2.418.

The Equity Multiplier is calculated as Total Assets / Total Equity. Given that Total Assets is $11.3 million, we can calculate Total Equity as $11.3 million / 2.418 = $4.67 million. However, the given total debt is $4.9 million, which is larger than the calculated Total Equity. Therefore, the statement is False.