Chang Corp.has $375,000 of assets,and it uses only common equity capital (zero debt).Its sales for the last year were $550,000,and its net income was $25,000.Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%.What profit margin would the firm need in order to achieve the 15% ROE,holding everything else constant? Do not round your intermediate calculations.
A) 10.02%
B) 12.58%
C) 10.23%
D) 9.51%
E) 8.59%

Question

Quizplus · Accepted Answer

To achieve a 15% return on equity (ROE) with $375,000 of equity, Chang Corp. needs to earn $56,250 (15% of $375,000). The profit margin is calculated as net income divided by sales. Therefore, to find the required profit margin to achieve a 15% ROE, divide the required net income ($56,250) by the sales ($550,000), which equals 0.1023 or 10.23%.