Question

Consider a retail firm with a net profit margin of 3.09%​,a total asset turnover of 1.79​,total assets of $45.1 million, and a book value of equity of $18.9 million.

a. What is the​ firm's current​ ROE?

b. If the firm increased its net profit margin to 3.88%​, what would be its​ ROE?

c.​ If, in​ addition, the firm increased its revenues by 19%

​(maintaining this higher profit margin and without changing its assets or​ liabilities), what would be its​ ROE?

In January 2016​, United Airlines​ (UAL) had a market capitalization of $20.67 billion, debt of $12.04 billion, and cash of $5.07 billion. United Airlines had revenues of $38.88 billion. Southwest Airlines​ (LUV) had a market capitalization of $27.47​billion, debt of $3.34 billion, cash of $3.14 ​billion, and revenues of $19.71 billion.

a. Compare the market​ capitalization-to-revenue ratio​ (also called the​ price-to-sales ratio) for United Airlines and Southwest Airlines.

b. Compare the enterprise​ value-to-revenue ratio for United Airlines and Southwest Airlines.

c. Which of these comparisons is more​ meaningful? Explain.

Answer 1

I can only answer 1 question at a time so I am solving first question.

Part (c) since profit margin is as it is which means that no value among the 3 parts of du-Pont formula ha changed and hence ROE will remain same as 16.57%.

Please do rate me and mention doubts, if any, in the comments section .