Question

QUESTION 9 (4 + 2 + 2 = 8 marks)

Peanut Queen and Lord of Ice are two competitors selling ice-cream. Below is the information pertaining to the two businesses for the financial year ended June 30, 2020.

	Peanut Queen	Lord of Ice
Net Profit ($)	95,000	180,000
Cost of Goods Sold ($)	100,000	800,000
Total Assets ($)	400,000	600,000
Total Liabilities	150,000	225,000
Gross Profit ($)	150,000	400,000

Rita has $25,000 to invest in one of the businesses. She likes peanut butter ice-cream but needs to consider the financial performance of the two businesses to make an informed investment decision.

Required:

In the table below, calculate Net Profit Margin, Asset Turnover, Financial Leverage, and Return on Equity (ROE) ratios for the two businesses.

	Peanut Queen	Lord of Ice
Net Profit Margin
Asset Turnover
Financial Leverage
ROE

Based on the financial performance alone, which one of the two businesses would you recommend to Rita to invest in? Considering the components of the DuPont model, which component is driving the financial performance of the business you chose?

Answer here:

For the business you recommended, calculate ROE for the financial year ending on June 30, 2021. In your calculation, assume that:

• Rita’s investment of $25,000 would increase the net profit of the business by $10,000 in the financial year ending June 30, 2021 compared to the financial year ended on June 30, 2020, and
• the $25,000 investment will be the only change to the business’ Owner’s Equity balance in the financial year ending June 30, 2021.

Answer 1

here i am providing you a formula for equity mulitiplire=Assets/shareholders equity

and equity muiltiplier for both company is 1.6 if you want to calculate ROE by following formula

ROE=net profit margin *assets turnover ratio *equity multiplier