Lollar Corporateion has a profit margin of 5 percent and its retrun on
assets (investments) is 13.5 perent.

a. What is its assset turnover ratio?

b. If the lollar crop has a debt to total assests ration of 60
percent, what will the firms return on equity be?

c What would happen to return on equity if the devt tot total aseets
ratio decreased to 40 percent

An answer tonight would be great

Hi baseball2!!


a. What is its assset turnover ratio?

ROA = Profit margin * assset turnover ratio 

Then:

assset turnover ratio = ROA / Profit margin =
                      = 0.135 / 0.05 =
                      = 2.7


b. If the Lollar Corp. has a debt to total assests ratio of 60
percent, what will the firms return on equity be?

Return on equity = Return on assets / (1 - Debt/Assets) = 
                 = 0.135 / (1 - 0.60) =
                 = 0.3375 
ROE = 33.75%


c. What would happen to ROE if the debt to total assets ratio
decreased to 40 percent?

Return on equity = Return on assets / (1 - Debt/Assets) = 
                 = 0.135 / (1 - 0.40) =
                 = 0.2250
ROE = 22.50%

---------------------------------------------------------

I hope that this helps you. Feel free to request for a clarification
if you need it.

Regards.
livioflores-ga

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Clarification of Answer by livioflores-ga on 23 Apr 2005 22:26 PDT

Just to clarify answer a. :

ROA = Net Income/Total Assets =
    = Net Income/Total Assets * Sales/Sales =
    = Net Income/Sales * Sales/Total Assets =
    = Profit Margin * Asset Turnover ratio  

Then:

Asset Turnover ratio = ROA / Profit Margin 

Good luck!!

the answer to B above is wrong
ROE cannot be nknown unless the return on debt is given.
Say if a firm has assets of $100 so the total return = 100 * 12% = $ 12
Equity  = 60% of 100 = $60 
If the answer above were correct then the return to equity holders would be 
= 60 * 0.3375 = $20.25 
which is more than the total retun  (of $12)

The correct formula for ROE  = 
ROA + D/E(Ra-rd)

Good luck!!!