If Roten Rooters, Inc., has an equity multiplier of 1.57, total asset turnover o
ID: 2778685 • Letter: I
Question
If Roten Rooters, Inc., has an equity multiplier of 1.57, total asset turnover of 1.70, and a profit margin of 6.7 percent, what is its ROE? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
If Roten Rooters, Inc., has an equity multiplier of 1.57, total asset turnover of 1.70, and a profit margin of 6.7 percent, what is its ROE? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Explanation / Answer
Answer
Total Assets Turnover ratio = Turnover / Total Assets
1.70 = Turnover/ Total Assets
therefore Turnover = 1.7 total assets ( Equation 1)
Profit Marin = Profit / turnover
0.067= profit / turnover
replacing value of turnover from Equation 1
0.067= profit / 1.7 total assets
therefor profit = 1.7 total assets * 0.067 (equation 2)
Equity multiplier = Total assets / Total shareholders Equity
1.57= total assets / total shareholders equity
therefore shareholders equity = total assets / 1.57 (equation 3 )
Now, Return on equity = Profit / Total shareholders equity (using equation 2 & 3)
=(1.7*0.067*total assets ) / 0.637 total assets
= 0.1788 or 17.88%