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 $6 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 (millions) Sales Net income Total assets Total debt $620.0 18.6 350.0 220.0 What is the profit margin for child as a percentage of what they spend and the profit margin for the store? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Profit margin Child Store What is the store's ROE? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) ROE

Explanation / Answer

Child: Profit margin = NI / S = $6 / $100 = 0.06000, or 6.00%

Child: Profit Margin = 6%

Store: Profit margin = NI / S = $18,600,000 / $620,000,000 = 0.0300, or 3%

Store: Profit Margin = 3%

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 = $18,600,000 / ($350,000,000 220,000,000) = 18,600,000/ 130,000,000

ROE = 14.31%

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