Question

Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $515,000, 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?

a. 10.92%
b. 9.41%
c. 11.82%
d. 8.11%
e. 12.66%

Answer 1

Profit Margin = 10.92%

so correct option is a. 10.92%

Step-by-step explanation:

given data

assets = $375,000

sales = $515,000

net income = $25,000

return on equity = 15.0%

ROE = 15%

to find out

What profit margin would the firm need

solution

we know that Profit Margin is

profit margin = Net Income ÷ Sales .............1

here Net Income is = Common Equity × ROE

net income = $375,000 × 15%

so from equation 1

Profit Margin =
`(375,000*0.15)/(515000)`

so

Profit Margin = 10.92%

so correct option is a. 10.92%