Greg is interested in investing in a small company, and he thinks Good Buy Co.might be a good investment.He has been given the following information and would like to know the return on stockholder's equity.Assume Good Buy's marginal tax rate is 40%.
Earning before taxes $3 million
Net profit margin 3.6%
Total liabilities $15.0 million
Total stockholder's equity $10.0 million
A)12%
B)20%
C)15%
D)18%

Question

Quizplus · Accepted Answer

EAT = 3,000,000(1-.4) = $1,800,000
NPM = EAT/sales = 0.036
so Sales = 1,800,000/.036 = $50,000,000
E.M. = TA/ Equity = 25/10 = 2.5
R.O.E. = NPM × Total asset turnover × Equity multiplier R.O.E. = 0.036 × 50/25 × 2.5 = 0.18 or 18%

Greg Is Interested in Investing in a Small Company, and He