Question.....

Lily Cosmetics has annual sales of $500,000,000. They maintain a net after tax profit margin of 5% and they have a sales-to-assets ratio of 4.

A) What is the Return on assets?

B) If the debt/equity ratio is 0.5, what is the Return on Equity?

CaptainForest

a)
Return on assets = Net Income / Total Assets

Total Assets = sales-to-assets ratio of 4 and sales is $500,000,000
Total Assets = 4 x 500,000,000
Total Assets = $2,000,000,000 (2 billion)

Net Income = .05 x 500,000,000
Net Income = $25,000,000


Return on assets = Net Income / Total Assets
Return on assets = 25,000,000 / 2,000,000,000
Return on assets = 0.0125 = 1.25%


b)
Return on Equity = Net Income / Shareholder’s Equity

Net Income = $25,000,000

Shareholder’s Equity Calculation:
Debt/Equity ratio of .5
Therefore, total debt = total equity

Assets = Debt + Equity
So Equity = Assets / 2
Equity = 2,000,000,000 / 2
Shareholder’s Equity = $1,000,000,000


Return on Equity = Net Income / Shareholder’s Equity
Return on Equity = 25,000,000 / 1,000,000,000
Return on Equity = 0.025 = 2.5%