Consider a retail firm with a net profit margin of 3.52 %, a total asset turnove

Question

Consider a retail firm with a net profit margin of 3.52 %, a total asset turnover of 1.82, total assets of $ 45.1 million, and a book value of equity of $ 17.6 million.

a. What is the firm's current ROE?

b. If the firm increased its net profit margin to 4.04 %, what would be its ROE?

c. If, in addition, the firm increased its revenues by 22 % (maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE?

(Please give answer in % and Round to one decimal place.)

Explanation / Answer

a. Return on Equity = 3.52* 1.82 * 45.1/17.6 = 16.4164%

b. return on equity = 16.4164% * 4.04/3.52 = 18.8416%

c. return on equity = 18.8416% * 1.22 = 22.9867%

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