Carter Health System's return on equity, given a profit margin of 5.4 percent, sales of $4 million, total assets of $2 million, and debt financing of $800,000, is most nearly what?

• A. 12.0 percent
• B. 18.0 percent
• C. 22.0 percent
• D. 25.0 percent

Answer: (B)

Return on equity shows how much profit is earned for every dollar of shareholder equity. ROE = net income divided by equity. Net income comes from the profit margin times sales: 0.054 × 4,000,000 = 216,000. Equity is total assets minus debt: 2,000,000 − 800,000 = 1,200,000. So ROE = 216,000 / 1,200,000 = 0.18, or 18%.