Question

Kodiak Company has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, 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 up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?

Please show steps

Answer 1

ROE = Net income/total equity

0.15 = Net income/375000

Net income = 56250

Profit margin% = Net income/sales

Profit margin% = 56250/595000

Profit margin% = 9.45