Ace Engineering Inc.has a profitability ratio of 0.16,an asset turnover ratio of 1.5,a debt to equity ratio of 0.40,and a total asset to equity ratio of 1.40.What is the firm's ROE?

Question

Quizplus · Accepted Answer

The firm's Return on Equity (ROE) can be calculated using the Dupont formula, which is ROE = Profitability Ratio * Asset Turnover Ratio * Equity Multiplier. The Equity Multiplier is calculated as 1 + Debt to Equity Ratio. Given the profitability ratio of 0.16, asset turnover ratio of 1.5, and debt to equity ratio of 0.40, the Equity Multiplier is 1 + 0.40 = 1.40. Therefore, ROE = 0.16 * 1.5 * 1.40 = 0.336 or 33.60%.