A firm has a ROE of 14 percent and a debt-to-equity ratio of 40 percent. If the total asset turnover is 3.4, what is the firm's profit margin?
A) 2.94 percent
B) 3.86 percent
C) 4.29 percent
D) 5.67 percent

Question

Quizplus · Accepted Answer

ROE = (Net Income / Shareholder Equity) * 10014% = (Net Income / Shareholder Equity) * 100Net Income / Shareholder Equity = 14% / 100 = 0.14Debt-to-Equity Ratio = (Total Debt / Shareholder Equity)40% = (Total Debt / Shareholder Equity)Total Debt / Shareholder Equity = 40% / 100 = 0.4Total Asset Turnover = (Sales / Total Assets)3.4 = (Sales / Total Assets)Sales / Total Assets = 3.4Profit Margin = (Net Income / Sales) * 100Profit Margin = (Net Income / (Total Assets * Total Asset Turnover)) * 100Profit Margin = (0.14 * Shareholder Equity / (Total Assets * 3.4)) * 100Profit Margin = (0.14 * (1 + Debt-to-Equity Ratio) * Shareholder Equity / (Total Assets * 3.4)) * 100Profit Margin = (0.14 * (1 + 0.4) * Shareholder Equity / (Total Assets * 3.4)) * 100Profit Margin = (0.14 * 1.4 * Shareholder Equity / (Total Assets * 3.4)) * 100Profit Margin = (0.196 * Shareholder Equity / (Total Assets * 3.4)) * 100Profit Margin = 0.196 * (Shareholder Equity / Total Assets) * (1 / 3.4) * 100Profit Margin = 0.196 * (1 / 3.4) * 100Profit Margin = 0.0576 * 100Profit Margin = 5.76%The correct answer is A: 2.94 percent.

A Firm Has a ROE of 14 Percent and a Debt-To-Equity