Question

Rippard's has a debt ratio of 27 percent, a total asset turnover ratio of 1.3 and a return on equity (ROE) of 63 percent. Compute Rippard's net profit margin. (Record your answer as a percent rounded to one decimal place but do not include the percent sign in your answer. Thus, record.32184 = 32.1% as 32.1). Your Answer:

Answer 1

Formula to calculate return on equity
ROE	Profit margin*Total asset turnover*Equity multiplier
Using the above formula we can calculate profit margin
63%	Profit margin*1.3*(1+0.27)
63%	Profit margin*1.3*1.27
63%	Profit margin*1.651
Profit margin	63%/1.651
Profit margin	38.2%
Formula to calculate operating profit margin
Operating profit margin	Operating income/Sales
Operating income	Net income/(1-tax rate) + Interest expense
Operating income	300000/(1-0.40) + 200000
Operating income	500000+200000
Operating income	700000
Operating profit margin	700000/10000000
Operating profit margin	7.00%
Formula to calculate ROE
ROE	Return on assets*Equity multiplier
ROE	39%*(1+0.13)
ROE	44.1%