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# ROA, ROE, sales-to-assets ratio, profit margin

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1. Keller Cosmetics maintains a profit margin of 4 percent and a sales-to-assets ratio of 3.

a. What is its return on assets?

b. If its debt-equity ratio is 1.0, its interest payments and taxes are each \$10,000, and EBIT is \$40,000, what is the return on equity?

2. Sara Togas sells all its output to Federal Stores. The following table shows selected financial data, in millions, for the two firms:

Sales Profits Assets
Federal Stores \$100 \$10 \$50
Sara Togas \$20 \$4 \$20

a. Calculate the sales-to-assets ratio, the profit margin, and the return on the two firms.

b. Now assume that the two companies merge. If Federal continues to sell goods worth \$100 million how will the three financial ratios change?

3. Listed below are some common terms of sale. Explain what each means and then calculate the rate of interest paid by customers who pay on the due date instead of taking the cash discount.

a. 2/30, net 60. The customer is granted a 2% discount is paid within 30 days. The full amount is due in 60.

b. 2/5, EOM, net 30. This customer will receive 2%

c. COD. Cash on delivery. No interest is payable on cash.

#### Solution Summary

The solution calculates return on assets, return on equity, sales-to-assets ratio, profit margin, rate of interest.

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## ROE and ROA

2 SEPARATE SCENARIOS:

Keller Cosmetics maintains a profit margin of 4 percent and a sales-to-assets ratio of 3. What would its return on assets be (ROA) and how would you arrive at this answer?

If its debt-equity ratio is 1.0, its interest payments and taxes are each \$10,000, and EBIT is \$40,000, what is the return on equity and how would you arrive at this answer?

On average, it takes Keller Cosmetics customers 60 days to pay their bills. If Keller Cosmetics has annual sales of \$500 million, what is the average value of unpaid bills (how would you compute this in detail)?

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