Question

XYZ Corp. has an operating profit margin of 7%, a debt burden of .8, and has financed two-thirds of its assets through equity. What asset turnover ratio is necessary to achieve an ROE of 18%

Answer 1

Answer:

the asset turnover is 2.14

Explanation:

The computation of the asset turnover is shown below:

As we know that

ROE = Leverage ratio × Asset turnover × Profit margin × Burden of debt

.18 = 1.5 × Asset turnover × .07  .8

.18 = .084 × Asset turnover

So,

Asset turnover = 2.14

The leverage ratio is

= 3 ÷ 2

= 1.5

Hence, the asset turnover is 2.14