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A formula in financial analysis is Return on equity net profit marginx total asset turnover x equity multiplier Suppose that the equity multiplier is fixed at 3

Math Mar 01, 2021

A formula in financial analysis is Return on equity net profit marginx total asset turnover x equity multiplier Suppose that the equity multiplier is fixed at 3.0, but that the net profit margin is normally distributed with a mean of 3.9% and a standard deviation of 0.3 %, and that the total asset turnover is normally distributed with a mean of 1 4 and a standard deviation of 0.3. Set up and conduct a sampling experiment to find the distribution of the return on equity. Show how the results as a histogram would help explain your analysis and conclusions

Place "Equity Multiplier," "Net Profit Margin Mean, "Net Profit Margin Std Dev. "Total Asset Mean," and "Total Asset Std Dev in column A in rows 1, 2,3, 4, and 5, respectively, and place their corresponding values in column B. Place the column headers "Net Profit Margin, "Total Asset Turnover," and "Return on Equity" in cells C1, D1, and E1, respectively. To generate random numbers for the net pro margin based on the normal distribution, in the cels in the "Net Profit Margin" column, enter the formula -NORM. INV in the cells in column C below C1. To generate random numbers for the total asset turnover based on the normal distribution, in the cells in the "Total Asset Turnover" column, enter the formula in the cells in column D below D1. To calculate return on equity distribution values, in the cells in column E - NORM INV $ $ $ $ below E1, multiply pairs of values in the "Net Protit" and "Total Asset Turnover" columns by the value in cell

Expert Solution

Answer:

To generate random numbers for the net profit margin we enter the formula

ans: =NORM.INV(RAND(),$B$2,$B$3)

To generate random numbers for the total asset turn over we enter the formula

ans: =NORM.INV(RAND(),$B$4,$B$5)

To calculate the return on equity we multiply pairs of values in the "net profit" and "Total asset turnover" columns by the value in cell B1 (or $B$1)

PFA

 

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