Question

Henderson's Hardware has an ROA of 12%, a 8% profit margin, and an ROE of 19%. What is its total assets turnover? Do not round intermediate calculations. Round your answer to two decimal places. What is its equity multiplier? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Answer: We can use the DuPont Model to calculate the total assets turnover and equity multiplier:

ROE = ROA × Equity Multiplier

Equity Multiplier = Total Assets / Total Equity

Profit Margin = Net Income / Sales

Total Assets Turnover = Sales / Total Assets

Given:

ROA = 12%

Profit Margin = 8%

ROE = 19%

To find the Total Assets Turnover:

Profit Margin = Net Income / Sales

0.08 = Net Income / Sales

Net Income = 0.08 x Sales

ROA = 12%

ROA = Net Income / Total Assets

0.12 = 0.08 x Sales / Total Assets

Total Assets Turnover = Sales / Total Assets = 0.08 / 0.12 = 0.67

Therefore, the total assets turnover is 0.67.

To find the Equity Multiplier:

ROE = ROA x Equity Multiplier

0.19 = 0.12 x Equity Multiplier

Equity Multiplier = 0.19 / 0.12 = 1.58

Therefore, the equity multiplier is 1.58.

Note: The total assets turnover and equity multiplier are related to each other through the DuPont model. The product of these two ratios should be equal to the ROE. In this case, 0.67 x 1.58 = 1.06, which is approximately equal to 1.9 (ROE in decimal form). This confirms that our calculations are correct.

Explanation: