Asked by Trap muzik Blossom on Jul 13, 2024
Verified
Frederico's has a profit margin of 6 %, a return on assets of 8 %, and an equity multiplier of 1.4. What is the return on equity?
A) 6.7 %
B) 8.4 %
C) 11.2 %
D) 14.6 %
E) 19.6 %
Equity Multiplier
A financial leverage ratio that measures the portion of a firm's assets that is financed by stockholder's equity.
Profit Margin
A financial ratio that shows the percentage of revenue that remains as profit after all expenses have been paid, including costs, taxes, and interest.
Return On Assets
A performance metric that measures the efficiency of a company in generating profit from its assets.
- Execute the Du Pont Identity Technique to investigate the determinants affecting the return on equity of a firm.
- Acquire an understanding of the interrelation between financial performance measures like debt-equity ratio, return on assets, and return on equity.
Verified Answer
Given,
Profit Margin = 6%
Return on Assets (ROA) = 8%
Equity Multiplier = 1.4
Now, Asset Turnover = ROA/Profit Margin = 8%/6% = 1.33
Putting the values in the ROE formula, we get:
ROE = 6% x 1.33 x 1.4 = 11.2%
Therefore, the answer is (C) 11.2%.
Learning Objectives
- Execute the Du Pont Identity Technique to investigate the determinants affecting the return on equity of a firm.
- Acquire an understanding of the interrelation between financial performance measures like debt-equity ratio, return on assets, and return on equity.
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