Final answer:
The firm's current Return on Equity (ROE) is calculated by multiplying the net profit margin (3.6%) by the total asset turnover (1.88) and the equity multiplier (Total Assets/Book Value of Equity, which is 2.306), resulting in an ROE of 15.5%.
Step-by-step explanation:
The student is asking how to calculate the Return on Equity (ROE) for a retailing firm given certain financial data. To compute ROE, we use the formula ROE = Net Profit Margin × Total Asset Turnover × Equity Multiplier. In this case, the firm has a net profit margin of 3.6%, a total asset turnover of 1.88, total assets of $43.4 million, and a book value of equity of $18.8 million.
The Equity Multiplier is calculated by dividing Total Assets by the Book Value of Equity, i.e., $43.4 million ÷ $18.8 million = 2.306.
The ROE is, therefore: 0.036 × 1.88 × 2.306 = 0.155 or 15.5%.