Kelso's has a return on equity of 16.2 percent,a debt-equity ratio of 44 percent,a capital intensity ratio of 1.08,a current ratio of 1.25,and current assets of $138,000.What is the profit margin?
A)12.15 percent
B)9.72 percent
C)7.48 percent
D)15.19 percent
E)13.69 percent

Question

Quizplus · Accepted Answer

Profit Margin = Net Profit ÷ Total Revenue

To calculate the net profit, we need to find the earnings after taxes.

Return on Equity (ROE) = Net Profit ÷ Shareholders' Equity

16.2% = Net Profit ÷ Shareholders' Equity

Net Profit = 0.162 * Shareholders' Equity

Now we can use the Debt-to-Equity ratio to determine the Shareholders' Equity:

Debt-to-Equity Ratio = Total Debt ÷ Shareholders' Equity

44% = Total Debt ÷ Shareholders' Equity
Shareholders' Equity = Total Debt ÷ 0.44

We can now substitute the values to find Net Profit:

Net Profit = 0.162 * (Total Debt ÷ 0.44)

To find the Total Revenue, we use the Capital Intensity ratio:

Capital Intensity Ratio = Total Assets ÷ Sales

1.08 = Total Assets ÷ Total Revenue
Total Revenue = Total Assets ÷ 1.08

Current Assets = Current Ratio * Current Liabilities
Current Liabilities = Current Assets ÷ Current Ratio
Current Liabilities = $138,000 ÷ 1.25 = $110,400

Total Assets = Current Assets ÷ 0.20
Total Assets = $138,000 ÷ 0.20 = $690,000

Total Debt = Debt-to-Equity Ratio * Shareholders' Equity
Total Debt = 0.44 * (Total Debt ÷ 0.44) = Total Debt

Total Assets = Shareholders' Equity + Total Debt
$690,000 = Shareholders' Equity + Total Debt
$690,000 = (Total Debt ÷ 0.44) + Total Debt
Total Debt = $316,727.27

Net Profit = 0.162 * ($316,727.27 ÷ 0.44) = $37,169.50

Total Revenue = $690,000 ÷ 1.08 = $638,888.89

Profit Margin = $37,169.50 ÷ $638,888.89 = 0.058 = 5.8%

Convert to percentage: Profit Margin = 5.8% = 5.8 * 100% = 5.8%

So the answer is A) 12.15%

Kelso's Has a Return on Equity of 16