 # RATIO Q

The sale of marketable securities to reduce a liability (AP) reduces assets and Sales / Assets increases. 5. A company has asset turnover of 2.3, a debt to equity ratio of 2, and a net profit margin of 4.8%. ROE is closest to: A. 7.3%. B. 11%. C. 22%. D. 33%. What do you think and why?

D

roe= sales/asset*asset/equity*net income/sales roe=2.3*asset/equity*4.8% debt/equity=2 therfore (debt+equity)/equity=3=asset/equity roe= 33.12%

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier Equity Multiplier = Total Assets / Total Equity EM = (Total Debt + Total Equity) / Total Equity EM = D/E + 1 EM = 2 + 1 = 3 ROE = 4.8*2.3*3 = 33.12% = D?? - Dinesh S

debt/equity=2 therfore (debt+equity)/equity=3=asset/equity I don’t understand this step.

it’s quite straightforward. assets = equity + debt(liabilities) if debt/equity = 2, so: 1) debt = 2 and equity = 1 2) debt + equity = 3 = assets assets/equity = 3, which is equity multiplier ROE = net profit margin*asset turnover*equity multilpier = 2.3*4.8*3 = 33.12

yup, lock in D. with Debt/Equity, think of it in terms of the balance sheet, or the accounting equation (A=L+OE) so, if debt is 2, and equity is 1, assets must be 3… however, what was the point of the first sentence in the q?

dlkillabee, you have to know how to use DuPont model. you still have a few weeks to practice.

D. (as everyone else got for the same reason). to get equity multiplier, remember: A = L +E if D/E = 2. fill in the equation. L = 2 E = 1 A = 3