Question

Keller Cosmetics maintains a profit margin of 5 percent and asset turnover ratio of 3

What is its ROA?

If its debt-equity ratio is 1.0, its interest payments and taxes are each $8,000, and EBIT is $20,000, what is its ROE?

Answer 1

for Keller Cosmetics

1. Calculation of ROA (Return on Asset):

ROA can also be written as :

(using values given in question)

ROA = 3 x 5%

Therefore, ROA = 15%

2. Calculation of ROE (Return On Equity):

(from working note 1 & 2 )

ROE = 0.30 = 30 %

Working Notes:

1. Calculation of Net Income:

Net Income = EBIT - Interest - Tax = 20000 - 8000 - 8000 = $ 4000

2. Calculation of Shareholders Equity:

from Part 1

(using values calculated above)

Total Assets = $ 26,666.66666667 .......(a)

(given in question, Debt-Equity = 1)

Therefore ,

Total Liabilities = Shareholders Equity ........(b)

Now ,

Total Assets = Total Liabilities + Shareholders Equity

(from a & b)

26666.66666667 = Shareholders Equity + Shareholders Equity

26666.66666667 = 2 x Shareholders Equity

Therefore,

Shareholders Equity = $ 13,333.3333333