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Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 2.If its...

Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 2.If its debt-equity ratio is 1, its interest payments and taxes are each $8,700, and EBIT is $23,500, what is its ROE? (Do not round intermediate calculations. Enter your answer as a whole percent.)

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Expert Solution

20%

Working:

a. Sales = EBIT/Operating profit margin = $        23,500 / 8% = $ 2,93,750
EBIT is operating profit.
b. Assets = Sales /Assets Turnover
= $ 2,93,750 / 2
= $ 1,46,875
c. Debt-Equity ratio = 1
It means,
Liability = Equity
As per Balance Sheet equation,
Assets = Liability + Equity
or,
Assets = Equity + Equity (Laibility is equal to Equity as per debt-equity ratio)
or,
Assets = 2 Equity
or,
Equity = Assets /2
or,
Equity = $   1,46,875 /2
or,
Equity = $       73,438
d. EBIT $       23,500
Less:Interest and Taxes $         8,700
Net Income $       14,800
e. Return on equity = Net Income/Equity
= $       14,800 / $ 73,438
= 20%

jeff jeffy answered 3 years ago
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