Profitability Ratios DJ's Soda Fountain has asked you to help piece together financial information on the firm for the most current year.Managers give you the following information: sales = $20 million,total debt = $3 million,debt ratio = 75 percent,ROE = 27 percent.Using this information,what is DJ's ROA?
A).0675 percent
B)6.75 percent
C)25.00 percent
D)27.00 percent

Question

Quizplus · Accepted Answer

ROE (Return on Equity) can be calculated using the DuPont Model:

ROE = (Net Profit Margin) x (Total Asset Turnover) x (Equity Multiplier)

Using the given information, we can solve for the Net Profit Margin and Total Asset Turnover:

Debt Ratio = Total Debt / Total Assets

0.75 = 3 million / Total Assets

Total Assets = 4 million

Equity Multiplier = Total Assets / Total Equity

1 + Debt Ratio = 1 + (Total Debt / Total Equity) = Equity Multiplier

1 + (3 million / Total Equity) = 1.75

Total Equity = 1.714 million

ROE = 27 percent

27% = (Net Profit Margin) x (Total Asset Turnover) x (1.75)

Net Profit Margin x Total Asset Turnover = 0.449

ROA (Return on Assets) can be calculated using the formula:

ROA = Net Profit Margin x Total Asset Turnover

ROA = 0.449 / 1.75

ROA = 0.256

ROA in percentage = 0.256 x 100 = 6.75%

Therefore, the answer is B) 6.75 percent.

Profitability Ratios DJ's Soda Fountain Has Asked You to Help