Question

The Golden Eagle Corporation has the following items on their income and balance sheets (values in tables are in thousands:

Balance Sheet Items
(Assets)

	Last Year	Two Years Ago
Cash	500	500
Accounts Receivable	580	490
Inventory	283	279
Total Current Assets
Fixed Assets	4700	5100
Depreciation	2375	2071
Net Fixed Assets

Balance Sheet Items
(Liabilities)

Accounts Payable	560	520
Notes Payable	87	99
Total Current Liabilities
Long Term Liabilities	1030	1000
Total Liabilities
Preferred Stock	130	130
Common Stock	3294	3294
Retained Earnings	1435	1075
Total Liabilities and Equity

Income Statement Items

	Past Year	Two Years Ago
Sales	3120	2500
Cost of Goods Sold	1840	1650
Operating Expenses	565	540
Interest Paid	96	91
Taxes Paid	85	79
Preferred Stock Dividends Paid	94	24

Using the Dupont System of Analysis, what is the Return on Equity last year for Golden Eagle? (show answers to four decimal places.) (Express answer as .XXXX)

Answer 1

ROE = Net profit margin × Asset turnover × Equity multiplier

ROE = (net profit ÷ sales) × (sales ÷ assets) × (assets ÷ equity)

Net profit margin = net profit ÷ sales

Net profit = Sales - Cost of Goods sold - Operating Expenses - Interest paid - Taxes paid

= 3120 - 1840 - 565 - 96 - 85 = 534

Net profit margin = 534/3120 = 0.1711

Assets turnover = sales ÷ assets

Total assets = Total current assets + Net fixed assets = 500+580+283+4700-2375 = 3688

Assets turnover = 3120/3688 = 0.8459

Equity multiplier = assets ÷ equity

Shareholders' Equity = Common stock + Retained earnings = 3294+1435 = 4729

Equity multiplier = 3688/4729 =0.7798

ROE = Net profit margin × Asset turnover × Equity multiplier = 0.1711*0.8459*0.7798 = 0.1128