Asked by Ibrahim Budak on Jul 06, 2024
Verified
The Marshall Company has determined that its return on equity is 18.5%. Management is interested in the various components that went into this calculation. You are given the following information: Sales = $12 M, Return on Assets = 7.5% and Return on Sales = 4.5%. What percentage of the company's assets are financed by equity? (Round to the nearest whole percentage)
A) 24%
B) 37%
C) 41%
D) 53%
Return on Equity
A measure of a company's profitability by revealing how much profit a company generates with the money shareholders have invested.
Return on Assets
A profitability ratio that indicates how efficiently a company is using its assets to generate earnings.
Return on Sales
A financial ratio that calculates how efficiently a company is generating profits from its revenue, typically expressed as a percentage of sales revenue that turns into net income.
- Examine assorted financial ratios and comprehend their significance.
- Compute the debt ratio and elucidate its repercussions on the financial architecture of an enterprise.
Verified Answer
CG
Caleb GibbonsJul 11, 2024
Final Answer :
C
Explanation :
First, we need to use the formula for Return on Equity (ROE):
ROE = Net Income / Average Equity
We can rearrange the formula to solve for Average Equity:
Average Equity = Net Income / ROE
We are not given the values for net income, so we need to find it using the information given. We can use the formula for Return on Assets (ROA):
ROA = Net Income / Total Assets
We can rearrange the formula to solve for Net Income:
Net Income = ROA x Total Assets
Net Income = 0.075 x $12M
Net Income = $900,000
Now we can use the formula for Average Equity:
Average Equity = $900,000 / 0.185
Average Equity = $4,864,864.86
Next, we need to find the total assets of the company that are financed by equity. We can use the formula:
Equity Ratio = Equity / Total Assets
We can rearrange the formula to solve for Equity:
Equity = Equity Ratio x Total Assets
We are given the Return on Sales (ROS):
ROS = Net Income / Sales
We can rearrange the formula to solve for Net Income:
Net Income = ROS x Sales
Net Income = 0.045 x $12M
Net Income = $540,000
Now we can use the formula for Equity Ratio:
Equity Ratio = Average Equity / Total Assets
Equity Ratio = $4,864,864.86 / (Net Income / ROS)
Equity Ratio = $4,864,864.86 / ($540,000 / 0.045)
Equity Ratio = $4,864,864.86 / $12,000,000
Equity Ratio = 0.4054
Equity Ratio = 40.54%
Rounding to the nearest whole percentage gives us the answer of 41%. Therefore, the correct answer is C.
ROE = Net Income / Average Equity
We can rearrange the formula to solve for Average Equity:
Average Equity = Net Income / ROE
We are not given the values for net income, so we need to find it using the information given. We can use the formula for Return on Assets (ROA):
ROA = Net Income / Total Assets
We can rearrange the formula to solve for Net Income:
Net Income = ROA x Total Assets
Net Income = 0.075 x $12M
Net Income = $900,000
Now we can use the formula for Average Equity:
Average Equity = $900,000 / 0.185
Average Equity = $4,864,864.86
Next, we need to find the total assets of the company that are financed by equity. We can use the formula:
Equity Ratio = Equity / Total Assets
We can rearrange the formula to solve for Equity:
Equity = Equity Ratio x Total Assets
We are given the Return on Sales (ROS):
ROS = Net Income / Sales
We can rearrange the formula to solve for Net Income:
Net Income = ROS x Sales
Net Income = 0.045 x $12M
Net Income = $540,000
Now we can use the formula for Equity Ratio:
Equity Ratio = Average Equity / Total Assets
Equity Ratio = $4,864,864.86 / (Net Income / ROS)
Equity Ratio = $4,864,864.86 / ($540,000 / 0.045)
Equity Ratio = $4,864,864.86 / $12,000,000
Equity Ratio = 0.4054
Equity Ratio = 40.54%
Rounding to the nearest whole percentage gives us the answer of 41%. Therefore, the correct answer is C.
Learning Objectives
- Examine assorted financial ratios and comprehend their significance.
- Compute the debt ratio and elucidate its repercussions on the financial architecture of an enterprise.