Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
A) 17.5%
B) 19.5%
C) 21.5%
D) 23.5%

Question

Quizplus · Accepted Answer

The return on equity (ROE) can be calculated using the formula ROE = (Net Profit Margin) * (Total Asset Turnover) * (Equity Multiplier), where the Equity Multiplier = 1 / (1 - Total Debt Ratio). Given a total debt ratio of 50%, the Equity Multiplier is 1 / (1 - 0.5) = 2. Therefore, ROE = 3.5% * 2.5 * 2 = 17.5%.