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What is a firm’s ROA if its operating margin is 27.4%, interest expense is 4.9% of...

What is a firm’s ROA if its operating margin is 27.4%, interest expense is 4.9% of sales, asset turnover is 1.9, and its tax rate is 23%? Round to the nearest 0.1%, drop the % symbol. E.g., if your answer is 25.74%, record it as 25.7.

Expert Solution

Required:

Interest expenses = 4.9% of sales

Operating margin or Operating income = 27.4% of sales

Thus, Pre-tax income = 22.5% of sales (i.e 27.4% - 4.9%)

Let net sales be X

Pre-tax income = 22.5% of X = 0.225X

Net income after tax = Pre-tax income * (1 - tax rate)

= 0.225X * (1 - 0.23)

Net income = 0.17325X

Asset turnover = Net sales / Total assets

1.9 = X / Total assets

Total assets = X / 1.9

Return on assets = Net income / Total assets

= (0.17325X / X) * 1.9

= 0.17325 * 1.9

= 0.329175 = 32.9%

Thus, Return on assets (ROA) = 32.9%

jeff jeffy answered 2 years ago

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