 Business
15 August, 05:45

# New Doors Corp. has \$375,000 of total assets, and it uses \$187,500 of total shareholder's equity capital. Its sales for the last year were \$520,000, and its net income was \$25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity (ROE) up to 15.0%. What profit margin (PM) would the firm need in order to achieve the 15% ROE, holding everything else constant?a. 5.41%b. 8.11%c. 9.41%d. 10.71%e. 12.66%

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1. 15 August, 06:08
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Profit margin (PM) the firm needs in order to achieve the 15% ROE: a. 5.41%

Explanation:

The profit margin reflects a company's overall ability to turn income into profit, is calculated by formula:

Profit margin = Net income/Net sales

The return on equity (ROE) is calculated by following formula:

ROE = Net income/shareholder's equity

New Doors Corp. uses \$187,500 of total shareholder's equity capital and gets the return on equity (ROE) up to 15.0%

Net income = ROE x Shareholder's equity = 15.0% x \$187,500 = \$28,125

Profit margin = \$28,125/\$520,000 = 0.0541 = 5.41%