Question

Manufacturer A has a profit margin of 2.0%, an asset turnover of 1.7 and a liabilities-to-assets ratio of 0.8. Manufacturer B has a profit margin of 2.3%, an asset turnover of 1.1 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE

Answer 1

1.54

Step-by-step explanation:

The computation of the asset turnover for manufacturer B to match with the manufacturer A is shown below:

As we know that

Return on equity = profit margin × asset turnover × gearing

2 × 1.7 × 4.9 = 2.3 × Asset tunover × 4.7

After solving this, the asset turnover is 1.54 times

So it should be 1.54 for matching

Also, we assume that there is an equity multiplier for manufacturer A of 4.9 instead of liabilities-to-assets ratio so we considered the same in the above computation part