Answer and Explanation:
The correct answer is: c. Mindful has a lower ROE primarily because it generates less sales per dollar of assets than other firms in the industry.
The Return on Equity (ROE) measures the profitability of a company by comparing its net income to the shareholders' equity. It is calculated by dividing the net income by the shareholders' equity.
Profit margin represents the percentage of each dollar of sales that a company keeps as profit, indicating the company's ability to generate profits from its sales. It is calculated by dividing the net income by the sales.
Total Asset Turnover measures how efficiently a company uses its assets to generate sales. It is calculated by dividing the sales by the average total assets.
Equity Multiplier is a measure of financial leverage and represents the degree of a company's reliance on debt financing. It is calculated by dividing the average total assets by the average shareholders' equity.
Comparing the ratios of Mindful Inc. to those of the industry, we see that Mindful has a lower ROE (9% compared to 17.4%) despite having the same Equity Multiplier (3).
This suggests that the difference in ROE is primarily due to other factors, not the level of debt.
Considering that the Profit Margin is lower for Mindful (1% compared to 2%), it indicates that Mindful makes less profit per dollar of sales than other firms in the industry.
Furthermore, since the Equity Multiplier is the same for both Mindful and the industry (3), it is not a major contributing factor to the lower ROE.
Therefore, the most likely reason for Mindful having a lower ROE is that it generates less sales per dollar of assets compared to other firms in the industry. This means that Mindful is less efficient in utilizing its assets to generate sales, leading to a lower overall ROE.