Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and raise the return on equity to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?
A) 9.45%
B) 9.93%
C) 10.42%
D) 10.94%

Question

Quizplus · Accepted Answer

ROE = Net Income / Stockholders' Equity15% = $25,000 / Stockholders' EquityStockholders' Equity = $375,000Net Income = $25,000Sales = $595,000Profit Margin = Net Income / SalesProfit Margin = $25,000 / $595,000Profit Margin = 9.45%