Answer :
Answer:
a. What is its ROA?
return on assets (ROA) = profit margin x asset turnover = 7% x 4 = 28%
mathematically it can be solved this way:
profit margin = net income / total sales
total sales = net income / 7%
asset turnover = total sales / total assets
total sales = 4 x total assets
net income / 7% = 4 x total assets
ROA = net income / total assets = 7% x 4 = 28%
b. If its debt-equity ratio is 1, its interest payments are $9,300 and taxes are $10,600, and EBIT is $26,500, what is its ROE?
ROE = profit margin x asset turnover x leverage
leverage = net income / earnings before taxes
net income = EBIT - interests - taxes
net income = $26,500 - $9,300 - $10,600 = $6,600
earnings before taxes = EBIT - interests = $26,500 - $9,300 = $17,200
leverage = $6,600 / $17,200 = 0.38372
ROE = 7% x 4 x 0.38372 = 10.74416% ≈ 10.74%