Selzer Inc. sells all of its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. The firm's return on equity (ROE) is:
A)7.1%.
B)33.3%.
C)3.3%.
D)71.0%.
E)8.1%.

Question

Quizplus · Accepted Answer

ROE = Profit Margin x Total Asset Turnover x Equity Multiplier

Total Asset Turnover = 365 / Days Sales Outstanding = 365 / 60 = 6.08

Equity Multiplier = Total Assets / Total Equity = 1 + Debt Ratio = 1 + 0.64 = 1.64

Substitute the given values into the ROE equation:

ROE = 0.04 x 6.08 x 1.64 = 0.3983 or 3.983%

Therefore, the closest answer choice is C, 3.3%.