In response to complaints about high prices, a grocery chain runs the following

Question

In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $9 to go buy $100 worth of groceries, then your child makes twice as much on the trip as we do.” You’ve collected the following information from the grocery chain’s financial statements:

In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $9 to go buy $100 worth of groceries, then your child makes twice as much on the trip as we do.” You’ve collected the following information from the grocery chain’s financial statements:

Explanation / Answer

Answer:-

Child: Profit margin = NI / S = $9 / $100 = 0.09000, or 9.00%

Store: Profit margin = NI / S = $25,200,000 / $560,000,000 = 0.04500, or 4.50%

The advertisement is referring to the store’s profit margin, but a more appropriate earnings measure for the firm’s owners is the return on equity

ROE = NI / TE = NI / (TA – TD)

ROE = $25,200,000 / ($460,000,000 330,000,000) = 0.1938, or 19.38%

ROE = NI / TE = NI / (TA – TD)

ROE = $25,200,000 / ($460,000,000 330,000,000) = 0.1938, or 19.38%

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