Question

Lee Sun's has sales of $3,650, total assets of $3,350, and a profit margin of 5 percent. The firm has a total debt ratio of 41 percent. What is the return on equity?

Answer 1

To calculate the return on equity (ROE), we can use the following formula:

\[
\text{ROE} = \frac{\text{Net Income}}{\text{Equity}}
\]

### Step 1: Calculate Net Income

Given that the profit margin is 5%, we can calculate the Net Income using the sales.

\[
\text{Net Income} = \text{Sales} \times \text{Profit Margin}
\]
\[
\text{Net Income} = 3,650 \times 0.05 = 182.5
\]

### Step 2: Calculate Total Liabilities

We know the total debt ratio is 41%, which means 41% of total assets are liabilities.

\[
\text{Total Debt} = \text{Total Assets} \times \text{Total Debt Ratio}
\]
\[
\text{Total Debt} = 3,350 \times 0.41 = 1,373.5
\]

### Step 3: Calculate Total Equity

To find equity, we use the relationship between assets, liabilities, and equity:

\[
\text{Equity} = \text{Total Assets} - \text{Total Debt}
\]
\[
\text{Equity} = 3,350 - 1,373.5 = 1,976.5
\]

### Step 4: Calculate ROE

Now, we can calculate ROE using the net income and equity.

\[
\text{ROE} = \frac{182.5}{1,976.5}
\]
\[
\text{ROE} \approx 0.0922 \quad \text{or} \quad 9.22\%
\]

Thus, the return on equity (ROE) is approximately **9.22%**.