In response to complaints about high prices, a grocery chain runs the following

Question

In response to complaints about high prices, a grocery chain runs the following advertising campaign: "If you pay your child $13 to go buy $100 worth of groceries, then your child makes twice as much on the trip as we do." You've collected the following information from the grocery chain's financial statements: (millions) Sales Net income Total assets Total debt $600.0 39.0 500.0 370.0 What is the profit margin for child as a percentage of what they spend and the profit margin for the store? Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Profit margi Child Store What is the store's ROE? rounded to 2 decimal places, e.g., 32.16.) (Do not round intermediate calculations. Enter your answer as a percent ROE

Explanation / Answer

Profit Margin

Child

13

%

Store

6.5

%

ROE

30

%

Explanation:

Profit margin = Net Income / Sales

Profit margin for child = $ 13/ $ 100 = 0.13 or 13 %

Profit margin for store = $ 39,000,000/ $ 600,000,000 = 0.065 or 6.5 %

Return on equity = Net Income/Total equity = Net Income/ (Total Asset – Total Debt)

Return on equity of store = $ 39,000,000/ ($ 500,000,000 - $ 370,000,000)

                                              = $ 39,000,000/130,000,000

                                              = 0.3 or 30 %

Profit Margin

Child

13

%

Store

6.5

%

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