LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

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15 February, 16:12

LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?

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Callum Ball · Answer 1

The profit margin will need to be of 7.57%

Explanation:

the profit margin is the ratio between net income and sales

net income / sales = profit margin

We are asked for the profit margin at which ROE = 15%

ROE return on equity

ROE = net income / equity

This company has zero debt, so equity = assets = 312,900

Desired ROE = 15%

net income / equity = 15%

net income / 312,900 = 15%

312,900 x 15% = net income

target net income = 46,935

target profit margin

target net income / sales

46,935/620,000 = 0,07570161 = 7.57%