Question A firm\'s ROE has increased from 2017 to 2018. Using the information be

Question

Question A firm's ROE has increased from 2017 to 2018. Using the information below, identify the ROE component that is responsible for the increase. 2018 10,000.00 25,000.00 10,000.00 100,000.00 25,000.00 170,000.00 2017 8,000.00 5,000.00 5,000.00 110,000.00 25,000.00 153,000.00 Inventory Prepaid Expenses Property, Plant, and Equipment Total Assets Accounts Payable 5,000.00 15,000.00 25,000.00 50,000.00 1,000.00 50,000.00 24,000.00 170,000.00 10,000.00 8,500.00 7,000.00 60,000.00 1,000.00 50,000.00 16,500.00 153,000.00 Current Portion of Long Term BondsS Payable Long Term Bonds Payable Common Stock, Par Common Stock, Paid in Capital Retained Earnings Total Liabilities and Equity Sales COGS Gross Profit 100,000.00 25,000.00 75,000.00 20,000.00 55,000.00 5,000.00 60,000.00 12,600.00 47.400.00 90,000.00 20,000.00 70,000.00 18,000.00 52,000.00 10,000.00 42,000.00 8,820.00 33,180.00 EBIT

Explanation / Answer

ROE = Profit margin*Total asset turnover*Equity multiplier Profit margin = Net income/Sales Sales/Total asset turnover Equity multiplier = Total assets/Total shareholders' equity These ratios for the years 2017 and 2018 are calculated as shown below: 2018 2017 1) Net income 47400 33180 Sales 100000 90000 Profit margin 47.40% 36.87% 2) Total assets 170000 153000 Total asset turnover 0.59 0.59 3) Total shareholders' equity 75000 67500 Equity multiplier 2.27 2.27 4) ROE 63.20% 49.16% The ROE component that has caused the increase is the Profit margin, which has increased from 36.87% to 47.40%. The other two components have no change.

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