Consider a retail firm with a net profit margin of 3.42 % , a total asset turnover of 1.88 , total assets of $ 45.9 million, and a book value of equity of $ 18.6 million. a. What is the firm's current ROE? b. If the firm increased its net profit margin to 4.19 % , what would be its ROE?

The answer is a. $15.88%

b. 19.46%

Explanation:

a. Equity multiplier = total assets / shareholders equity

Equity multiplier = $ 45.9 million / $ 18.6 million = 2.47

ROE = net profit * asset turnover * Equity multiplier

ROE = 3.42% * 1.88 * 2.47 = $15.88%

b. ROE = net profit * asset turnover * Equity multiplier

ROE = 4.19 % * 1.88 * 2.47 = 19.46%