Question

# Problem 3-18 Using the DuPont Identity [LO3] Y3K, Inc., has sales of \$6,279, total assets of...

Problem 3-18 Using the DuPont Identity [LO3] Y3K, Inc., has sales of \$6,279, total assets of \$2,895, and a debt–equity ratio of 1.90. If its return on equity is 13 percent, what is its net income? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Net income = \$

Total Asset Turnover

Total Asset Turnover = Total Sales / Total Assets

= \$6,279 / \$2,895

= 2.1689 Times

Return on Equity (ROE) using the DuPont Model

As per DuPont Model, the Return on Equity (ROE) is calculated by using the following formula

Return on Equity (ROE) = Net Profit Margin x Total Asset Turnover x Equity Multiplier

Return on Equity (ROE) = Net Profit Margin x Total Asset Turnover x [1 + Debt-equity ratio]

13.00% = Net Profit Margin x 2.1689 Times x [1 + 1.90]

13.00% = Net Profit Margin x 2.1689 Times x 2.90

13.00% = Net Profit Margin x 6.2898%

Net Profit Margin = 13.00% / 6.2898%

Net Profit Margin = 2.0668%

Net Income

Net Income = Total sales x Net Profit Margin

= \$6,279 x 2.0668%

= \$129.78

“Hence, the Net Income will be \$129.78”

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