Question

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm’s ROA?

Answer 1

Solution :-

Profit margin = 15%

Sales = $20,000,000

Total assets = $22,500,000

Firstly , we will calculate total asset turnover ratio .

Total asset turnover ratio :-

= Sales / Total assets

= $20,000,000 / $22,500,000

= 0.8888889

Now , we will calculate Return on assets (ROA) :-

= Profit margin * Total asset turnover ratio

= 15% * 0.8888889

= 13.3333335 %

Or 13.33%

So, firm's ROA is 13.33%