Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE?
A) 1.59% B) 3.18% C) 2.23% D) 1.27%

A. 1.59%

Explanation:

Return on equity is a measure of profitability of a company in relation to the equity which is assets less liabilities.

Using Du Point analysis,

ROE = Net profit margin × Asset Turnover × Equity multiplier.

Therefore,

ROE of A = 2.2 × 1.7 × 5.0

= 18.7%

For ROE of B to match A

Asset turn over of B = ROE of A / profit margin of B × equity multiplier of B.

NOTE:

This was gotten from from equating ROE of A to ROE of B and making asset turn over of B subject of the formula.

Therefore,

Given that,

ROE of A = 18.7%

Profit margin of B = 2.5%

Equity multiplier of B = 4.7

We then have,

Asset turnover of B = 18.7 ÷ ( 2.5 × 4.7)

= 18.7 ÷ 11.75

=1.59 %

Therefore B needs 1.59% asset turn over to match manufacturers A ROE

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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