Frederico's has a profit margin of 6%,a return on assets of 8%,and an equity multiplier of 1.4. What is the return on equity?
A) 6.7%
B) 8.4%
C) 11.2%
D) 14.6%
E) 19.6%

Question

Quizplus · Accepted Answer

Return on equity can be calculated as (Profit margin) x (Asset turnover) x (Equity multiplier), where Asset turnover is (Revenue)/ (Total assets).

Given profit margin = 6%, 
return on assets = 8%, and 
equity multiplier = 1.4

We can calculate asset turnover as:

Asset turnover = Revenue/Total assets = (Return on assets x Total assets)/ Total assets = Return on assets

So, asset turnover = 8%

Now, return on equity = (Profit margin) x (Asset turnover) x (Equity multiplier)

= 6% x 8% x 1.4

= 0.0336 or 3.36%

Therefore, the answer is option C) 11.2% (which is 100 x 3.36%)

Frederico's Has a Profit Margin of 6%,a Return on Assets