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# Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0 Answer

Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 2.0. Its sales are \$100 million and it has total assets of \$50 million. What is its ROE?

Ans:

ROE = Profit Margin * Total Assets Turnover * Equity Multiplier

ROE = (Net Income/Sales) * ( Sales/Total Assets) * ( Total Assets/Common Equity)

ROE = (3%) * (100/50) * 2 = 3% * 4 = 12%

(3-6) Du Pont Analysis

Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier?

Ans:

Profit Margin = Net Income/Sales

ROA= Profit Margin * Total Assets Turnover

10 %    = 2 % * Total Assets Turnover

Company’s total assets turnover = 5

ROE = Profit Margin * Total Assets Turnover * Equity Multiplier

15% = 2% * 5 * firm’s equity multiplier

Firm’s equity multiplier = 15/10 = 1.5

(3-7) Current and Quick Ratios

Ace Industries has current assets equal to \$3 million. The company’s current ratio is 1.5, and its quick ratio is 1.0. What is the firm’s level of current liabilities? What is the firm’s level of inventories?

Ans:

Company’s current ratio = Current Assets/ Current Liabilities = 3/Firm’s level of current liabilities

Firm’s level of current liabilities = 3/ 1.5 = \$2 million

Quick Ratio = (Current assets – Inventories) / Current Liabilities

1 = (3 – Inventories)/2

Inventories = 3-2 = \$1 million