Consider a retailing firm with a net profit margin of 3.6 % , a total asset turnover of 1.74 , total assets of $ 44.4 million, and a book value of equity of $ 18.4 million. a. What is the firm's current ROE? b. If the firm increased its net profit margin to 4.1 % , what would be its ROE? c. If, in addition, the firm increased its revenues by 23 % (while maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE?

a. 15.09624%

b. 17.19294%

c. 18.56837%

Explanation:

In this question, we use the DuPont formula which is shown below:

a. Return on equity = Net profit margin * total assets turnover * leverage factor

where,

leverage factor = Total assets : book value of equity

= $44.4 million : $18.4 million

= 2.41

Now the ROE equals to

= 3.6% * 1.74 * 2.41

= 15.09624%

b. If net profit margin is 4.1%, so the New ROE equals to

= 4.1% * 1.74 * 2.41

= 17.19294%

c. If revenue is increase by 23%, so it increase the asset turnover, and the new asset turnover equals to

= 1.74 * 123%

= 2.1402

Now, New ROE equals to

= 3.6% * 2.1402 * 2.41

= 18.56837%