Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8,

Question:

Consider a retail firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.

a. What is the firm’s current ROE?

b. If the firm increased its net profit margin to 4%, what would its ROE be?

c. If, in addition, the firm increased its revenues by 20% (while maintaining this higher profit margin and without changing its assets or liabilities), what would its ROE be?

Asset Turnover
Asset turnover is sales divided by total assets. Important for comparison over time and to other companies of the same industry. This is a standard business ratio.