Keller Cosmetics maintains an operating profit margin of 8% and asset turnover ratio of 3. a. What...

Free

70.2K

Verified Solution

Question

Finance

Keller Cosmetics maintains an operating profit margin of 8% andasset turnover ratio of 3.
a. What is its ROA? (Enter your answer as a whole percent.)
ROA 24 % (was able to figure out a)
b. If its debt-equity ratio is 1, its interest payments andtaxes are each $8,300, and EBIT is $21,500, what is its ROE? (Donot round intermediate calculations. Enter your answer as a wholepercent.) ____%

Answer & Explanation Solved by verified expert

4.2 Ratings (873 Votes)

Information provided:

Operating profit margin= 8%

Asset turnover ratio= 3

Return on assets is calculating using the below formula:

Return on assets= Net income/ asset.

Net income here is operating profit margin.

Return on assets= 8%*3= 24%.

b.Return on equity= Net income/ Equity

Net income= EBIT- Interest- Taxes

= $21,500 - $8,300 - $8,300

= $4,900.

Return on assets= Net income/ asset.

24%= $4,900/ Asset

Assets= $4,900/ 0.24= $20,416.67.

Debt equity ratio is 1 here.

Equity/Asset= 1/1+1= 0.5

Equity= 0.5*$20,416.67 = $10,208.34.

Return on equity= $4,900/ $10,208.34

= 0.48*100= 48%.

Therefore, return on equity is 48%.

In case of any query, kindly comment on the solution.

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Keller Cosmetics maintains an operating profit margin of 8% andasset turnover ratio of 3.a. What is its ROA? (Enter your answer as a whole percent.)ROA 24 % (was able to figure out a)b. If its debt-equity ratio is 1, its interest payments andtaxes are each $8,300, and EBIT is $21,500, what is its ROE? (Donot round intermediate calculations. Enter your answer as a wholepercent.) ____%