Problem 3: Consider the following information - Suppose we use the data from Kro

Question

Problem 3: Consider the following information -

Suppose we use the data from Kroger and Whole Foods:

KR - TTM

            WFM - TTM

Net Profit Margin

1.34%

2.44%

Total Asset Turnover

3.36

2.46

Equity Multiplier

5.83

1.91

Calculate Kroger and Whole Foods ROE and ROA from the data given.

We know that ROE = net income / book equity and ROA = net income / total assets;

while none of those components are given, we have ratios that can solve the problem!

Question? What would WFM's total asset turnover need to be for it to have the same ROE as Kroger?

KR - TTM

            WFM - TTM

Net Profit Margin

1.34%

2.44%

Total Asset Turnover

3.36

2.46

Equity Multiplier

5.83

1.91

Explanation / Answer

1) Return on Assets (ROA) = Net Profit Margin % x Total Asset Turnover Ratio (ATO)

Return on Equity (ROE) = Net Profit Margin x Asset Turnover Ratio x Equity Multiplier

i) ROE

Kroger = 1.34%*3.36*5.83= 26.25%

Whole foods= 2.44% * 2.46*1.91= 11.46%

ii) ROA

Kroger = 1.34%*3.36= 4.50%

Whole foods= 2.44%*2.46= 6.00%

2) 26.25%=2.44%*total asset turnover*1.91

Total Asset Turnover= 5.63

Thanks

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