Keller Cosmetics maintains an operating profit margin of 6% and asset turnover r

Question

Keller Cosmetics maintains an operating profit margin of 6% and asset turnover ratio of 2.

a. What is its ROA? (Enter your answer as a whole percent.)

b. If its debt-equity ratio is 1, its interest payments are $8,100 and taxes are $8,200, and EBIT is $20,500, what is its ROE? (Do not round intermediate calculations. Enter your answer as a whole percent.)

NOTE: The answer to "a" is 12%. I cant figure out how to calculate ROE correctly. The asnwer to "b" is NOT 24% or 8%. Please show your work neatly.

Explanation / Answer

A) ROA = operating profit margin* asset turnover ratio

=0.06*2=12%

B) if debt/equity = 1, then debt = equity, so total assets are twice equity.

ROE=( asset/equity )* ROA*Debt burden =( 2/1/)*0.12*($20500-$8100-$8200)/($20500-$8100)

= 0.24*4200/12400

= 8.13%

Thanks

Let me know if there is any doubt

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