6 A firm has a profit margin of 2 and an equity multiplier o

6, A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE?

Solution

Profit margin=Net income/Sales

Net income=($100million*2%)=$2million

Equity multiplier=Total assets/Total equity

Total equity=(50/2)=$25million

ROE=Net income/Total equity

=$2million/$25million

=which is equal to

=8%