A firm has return on equity of 15 percent, earnings before taxes of $30,000, total asset turnover of .80, a profit margin of 4.5 percent, and a tax rate of 35 percent. What is the return on assets?
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To calculate the return on assets (ROA), you need to use the formula:
ROA = Profit Margin x Total Asset Turnover
Let's break down the information you have:
- Return on Equity (ROE) = 15%
- Earnings Before Taxes (EBT) = $30,000
- Total Asset Turnover = 0.80 (or 80%)
- Profit Margin = 4.5%
- Tax Rate = 35%
First, let's find the net profit based on the profit margin and EBT:
Net Profit = EBT x (1 - Tax Rate)
= $30,000 x (1 - 0.35)
= $30,000 x 0.65
= $19,500
Next, we can calculate the Return on Assets (ROA):
ROA = Profit Margin x Total Asset Turnover
= 4.5% x 0.80
= 0.045 x 0.80
= 0.036
To convert the answer into a percentage, we multiply by 100:
ROA = 0.036 x 100
= 3.6%
Therefore, the Return on Assets (ROA) for the firm is 3.6%.