Question

The following table presents selected 2019 financial information for Sunder Company.

Sunder Company Selected 2019 Financial Data
Balance Sheet:
Average total assets	$1,000,000
Average total liabilities	500,000
Average stockholders' equity	500,000
Income Statement
Sales revenue	$1,000,000
Earnings before interest (net of tax)	20,000
Interest expense (net of tax)	15,000
Net income	5,000

Round answers to one decimal place (i.e., 0.0025 = 0.3%). Use negative signs with answers, when appropriate.

a. Compute Sunder's ROE, ROA, and ROFL for 2019

ROE
ROA
ROFL

b. Use the DuPont analysis described in the Business Insight on page 230 to disaggregate ROE.

Net profit margin
Asset turnover
Financial leverage

Answer 1

Answer -

a. Answer -

ROE	1.0%
ROA	2.0%
ROFL	-1.0%

Calculation:

ROE:

= (Net income / Average stockholders’ equity) * 100

= ($5,000 / $500,000) * 100

= 1.0%

ROA:

= [Earnings before interest (net of tax) / Average total assets] * 100

= [$20,000 / $1,000,000] * 100

= 2.0%

ROFL:

= ROE - ROA

= 1.0% - 2.0%

= -1.0%

b. Answer -

Net profit margin	0.5%
Asset turnover	1.0%
Financial leverage	2.0%

Calculation:

Net profit margin:

= (Net income/ Sales revenue) * 100

= ($5,000 / $1,000,000) * 100

= 0.5%

Asset turnover:

= (Sales revenue / Average total assets) * 100

= ($1,000,000 / $1,000,000) * 100

= 1.0%

Financial leverage:

= (Average total assets / Average stockholders’ equity) * 100

= ($1,000,000 / $500,000) * 100

= 2.0%