Lee Sun's has sales of $3,000, total assets of $2,500, and a profit margin of 5%.The firm has a total debt ratio of 40%.What is the return on equity?
A)6%
B)8%
C)10%
D)12%
E)15%

Question

Quizplus · Accepted Answer

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
Total Asset Turnover = Sales / Total Assets
Equity Multiplier = Total Assets / Total Equity
Given, 
Sales = $3,000
Total Assets = $2,500
Profit Margin = 5% = 0.05
Total Debt Ratio = 40% = 0.4
Total Equity = Total Assets - Total Debt = $2,500 - ($2,500 * 0.4) = $1,500
Substituting the values in the above formulas, we get,
Total Asset Turnover = $3,000 / $2,500 = 1.2
Equity Multiplier = $2,500 / $1,500 = 1.67
ROE = 0.05 * 1.2 * 1.67 = 0.10 or 10% 
Therefore, the answer is C) 10%.

Lee Sun's Has Sales of $3,000, Total Assets of $2,500