Question

In: Finance

Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 3. a....

Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 3.

a. What is its ROA? (Enter your answer as a whole percent.)

ROA 24 % (was able to figure out a)

b. If its debt-equity ratio is 1, its interest payments and taxes are each $8,300, and EBIT is $21,500, what is its ROE? (Do not round intermediate calculations. Enter your answer as a whole percent.) ____%

Expert Solution

Information provided:

Operating profit margin= 8%

Asset turnover ratio= 3

Return on assets is calculating using the below formula:

Return on assets= Net income/ asset.

Net income here is operating profit margin.

Return on assets= 8%*3= 24%.

b.Return on equity= Net income/ Equity

Net income= EBIT- Interest- Taxes

= $21,500 - $8,300 - $8,300

= $4,900.

Return on assets= Net income/ asset.

24%= $4,900/ Asset

Assets= $4,900/ 0.24= $20,416.67.

Debt equity ratio is 1 here.

Equity/Asset= 1/1+1= 0.5

Equity= 0.5*$20,416.67 = $10,208.34.

Return on equity= $4,900/ $10,208.34

= 0.48*100= 48%.

Therefore, return on equity is 48%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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