How much will Gamma Inc.'s equityholders earn given the following information: total asset turnover is 0.85,profit margin is 0.15,and debt-equity ratio is 0.25?

Question

Quizplus · Accepted Answer

To calculate the equityholders' earnings, we need to use the DuPont formula: Return on Equity (ROE) = Net Profit Margin x Total Asset Turnover x Equity Multiplier. The equity multiplier is calculated as 1 / (1 - Debt/Equity Ratio), which is 1 / (1 - 0.25) = 1.33. Plugging in the given values, we get ROE = 0.15 x 0.85 x 1.33 = 0.15 x 1.13 = 0.1695 or 16.95%. Therefore, the equityholders can expect to earn 15.94% (rounded to the nearest hundredth). The closest answer choice to this is B.

How Much Will Gamma Inc