Presented below are selected ratios derived from Hala Café’s financial statement

Question

Presented below are selected ratios derived from Hala Café’s financial statements:

Return on sales

12.7%

Total asset turnover

                  1.23

Financial leverage

                  1.84

Dividend retention rate

                 0.45

            Using the ROE model framework, how much is Hala Café’s ROE?

A/ 12.9%

B/ 1.02%

C/ 15.8%

D/ 28.7%

Return on sales

12.7%

Total asset turnover

                  1.23

Financial leverage

                  1.84

Dividend retention rate

                 0.45

Explanation / Answer

ROE= Return on sales×Total assets turnover ratio×Financial leverage (Net Income/Sales)×(Total Assets/Equity)×(Sales/Total Assets) =(0.127×1.23×1.84) =28.7% The Return on equity of Hala Café is 28.7% . Therefore the option (D) is correct answer.

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