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14 January, 10:29

Y3k, inc., has sales of $6,239, total assets of $2,855, and a debt-equity ratio of 1.30. If its return on equity is 15 percent, what is its net income?

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  1. 14 January, 10:58
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    We use the Du-Pont equation

    ROE = Net profit margin (NPM) * Total asset turnover * Equity multiplier

    ROE = 15% = 0.15

    Total asset turnover = Sales/total assets = 6239/2855

    Equity multiplier = 1 + debt-equity = 1 + 1.30 = 2.30

    0.15 = NPM * 6239/2855*2.30

    NPM = Set profit margin = 0.0298 = 2.98%

    Net profit margin = Net income / sales

    0.0298 = Net Income/6239

    Net Income = $186.20
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