In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $6 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

In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $6 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	$	760.0
Net income		22.8
Total assets		390.0
Total debt		260.0

 

What is the profit margin for child and store? (Round your answers to 2 decimal places. (e.g., 32.16))

 

	Profit margin
Child	%
Store	%

  

What is the store's ROE? (Round your answer to 2 decimal places. (e.g., 32.16))

  

ROE

%

Explanation:

Child:  Profit margin = NI / S = $6 / $100 = 0.06000, or 6.00%

Store:  Profit margin = NI / S = $22,800,000 / $760,000,000 = 0.03000, or 3.00%

  

The advertisement is referring to the store’s profit margin, but a more appropriate earnings measure for the firm’s owners is the return on equity.

  

ROE = NI / TE = NI / (TA – TD)

ROE = $22,800,000 / ($390,000,000 − 260,000,000) = 0.1754, or 17.54%