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%.
A) 12%
B) 20%
C) 15%
D) 18%

Question

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%. 
A) 12% 
B) 20% 
C) 15% 
D) 18%

Quizplus · Accepted Answer

Solution:
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