A firm's financial statements reveal the following data:
operating profit margin 41%
interest expense ratio 4.2%
debt-to-equity ratio 0.45
total asset turnover 1.6
tax rate 45%
The firm's ROE equals ________.
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A. B. C. D.B
ROE = Net income/Equity -
Now, Net Income = (Operating profits - interest expense)*(1 - tax rate)
Therefore, ROE = (Operating profits/equity - interest expense/equity) *(1 - tax rate) interest expense/equity = (interest expense/assets)*(assets/equity) = interest expense ratio*(1+debt/equity) = 4.2%*(1+0.45) = 6.09%
Operating profits/equity = (Operating profits/sales)*(sales/assets)*(assets/equity) = 41%*1.6*1.45 = 95.12%
Thus, ROE = (95.12% - 6.09%)*(1-45%) = 48.97%