Pigeon Forges' stakeholders require a 7% rate of return. The company currently has an ROI of 59.4% and a capital turnover of 3.6 What is Pigeon's sales margin?
A)213.8%
B)1)9%
C)16.5%
D)25.2%

Question

Quizplus · Accepted Answer

First, we can use the DuPont formula to find the sales margin:
ROI = (Sales/Total Assets) x (Total Assets/Total Equity) x (Total Equity/Sales) 
59.4% = (Sales/Total Assets) x (Total Assets/Total Equity) x (Total Equity/Sales)
Rearranging the formula: 
Sales Margin = (Total Equity/Sales) x (Total Assets/Total Equity) x ROI 
Sales Margin = (1/3.6) x (Total Assets/Total Equity) x 59.4%
To find the sales margin, we need to find the Total Assets/Total Equity ratio.
We can use the formula for the asset turnover ratio to find the Total Assets/Total Equity ratio:
Asset Turnover = Sales/Total Assets
3.6 = Sales/Total Assets
Total Assets/Total Equity = (Total Assets/ Sales) / (Total Equity/ Sales) = (1/3.6) / (1-1/3.6) = 1.39
Now we can calculate the sales margin:
Sales Margin = (1/3.6) x 1.39 x 59.4% = 16.5% 
Therefore, the best choice is C) 16.5%.

Pigeon Forges' Stakeholders Require a 7% Rate of Return