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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)?

#### Solution Preview

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?

Profit Margin = Net Income/Sales
Return on Assets = Net Income /Assets = Net Income/Sales X Sales/Assets
Give that Net Income/Sales is 4% and Sales to Assets is 3
Return on Assets = 4% X 3 = 12%

If its debt-equity ratio is 1.0, its interest payments and taxes are each ...

#### Solution Summary

The solution explains how to calculate the ROA and ROE

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