Keller Cosmetics maintains an operating profit margin of 8.55% and a sales-to-as
ID: 2768196 • Letter: K
Question
Keller Cosmetics maintains an operating profit margin of 8.55% and a sales-to-assets ratio of 3.00. It has assets of $610,000 and equity of $410,000. Interest payments are $41,000 and the tax rate is 30%.
What is the return on assets? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the return on equity? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Keller Cosmetics maintains an operating profit margin of 8.55% and a sales-to-assets ratio of 3.00. It has assets of $610,000 and equity of $410,000. Interest payments are $41,000 and the tax rate is 30%.
Explanation / Answer
a.
Calculation of Return On Assets (ROA):
ROA = Net income / Average total assets
Sales to assets ratio = 3
3 = Sales revenue / Assets
3 = Sales revenue / $610,000
Sales revenue = $610,000 *3
Sales revenue = $1,830,000
Operating profit = $1,830,000 * 8.55%
Operating profit = $156,465
Net income = Operating profit – Interest – Tax
= $156,465 - $41,000 – ($115,465 *30%)
= $80,826
Therefore, net income is $80,826
ROA = Net income / Average total assets
= $80,826 / $610,000
=0.133 times
b.
Return on equity (ROE):
= Net income / Shareholders equity
= $80,826 / $410,000
= 0.197 times
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