Question

Last year, PJ's Ice Cream Parlors, Inc. reported an ROE = 12.1%. The firm's debt ratio was 49%, sales were $36 million, and the capital intensity ratio was .86 times. What is the net income for PJ's last year? (Do not round intermediate steps.)

Answer 1

Calculation of Net Income:

Return on Equity = Net Income / Shareholders’ Equity

12.1% = Net Income / Shareholders’ Equity

Firms Debt Ratio = 49%; which implies that Shareholders’ Equity is 51%.

Calculation of Total Assets:

Capital Intensity ratio = Total Sales / Total Assets

0.86 = $ 36 Million / Total Assets

Total Assets = $ 36 Million / 0.86

Therefore, Total Assets = $ 41.8604 Million

If the Total Assets = $ 41.8604 Million, then the net worth = $ 41.8604 Million; Which consists of Shareholders’ Equity and Debts.

Hence, Shareholders’ Equity = $ 41.8604 Million * 51% = $ 21.3488 Million

Calculation of Net Income:

12.1% * Shareholders’ Equity = Net Income

Net Income = 12.1% * $ 21.3488 Million

Therefore, Net Income of the PJ’s Ice Cream Parlors, Inc. for the Last Year = $ 2.5832048 Million which can be rounded off to $ 2.58 Millions.