If a firm has an after-tax profit margin of 5%, an asset turnover of 2.5 times, and no debt, the return on equity is:

Question

Quizplus · Accepted Answer

The formula for return on equity (ROE) is ROE = net income / shareholders' equity. Since there is no debt, we can assume that total assets are equal to shareholders' equity. Therefore, we can use the formula ROE = net income / total assets. 
Given that the after-tax profit margin is 5% and the asset turnover is 2.5 times, we can calculate the ROE as: 
ROE = (5% x total assets) / total assets = 5% 
However, it's important to note that the 5% net income is multiplied by the asset turnover ratio (2.5) to get the total revenue. So, the actual net income is 5% of the total revenue, which is 5% x 2.5 = 12.5%. Therefore, the correct answer is C) 12.5%.

If a Firm Has an After-Tax Profit Margin of 5