Question

USE THE FOLLOWING INFORMATION TO CONSTRUCT AN INCOME STATEMENT AND BALANCE SHEET FOR 2011. ASSUME THE TAX RATE IS 40%. (COMMON EQUITY IS A PLUG IN NUMBER)

ITEM	2010	2011
SALES	10,000	12,000
DEPRECIATION	3,000	3,000
COST OF GOODS SOLD	2,000	2,000
OTHER EXPENSES	3,000	4,000
INTEREST	1,000	1,000
CASH	1,000	1,000
ACCOUNTS RECEIVABLE	3,000	3,000
S.T. NOTES PAYABLE	1,000	1,000
L.T. DEBT	10,000	11,000
NET FIXED ASSETS	20,000	20,000
ACCOUNTS PAYABLE	2,000	2,000
INVENTORY	3,000	3,000
DIVIDENDS	600	600

Please calculate the firm's three components DuPont ROE for 2011.

A. 10 x 2.077 x .044 = 9.23

B. 0.1 x 2.077 x 0.44 = 0.092

C. 0.05 x 0.519 x 0.481 = 0.012

D. 0.1 x 0.519 x 0.481 = 0.025

E. 0.1 x 0.519 x 0.44 = 0.023

Answer 1

Profit margin =Net Income /sales

      = 1200/12000

       = .10 or 10%

**Net Income before tax =sales -all expense

= 12000-3000-2000-4000-1000 = 2000

Income after tax =2000[1-.40]= 1200

2)Asset turnover = sales /average total asset

         = 12000/ 27000

        = .44

**total asset for 2010 = 1000+3000+20000+3000=27000

total asset for 2 011 =1000+3000+20000+3000=27000

Average total asset= [27000+27000]/2 = 27000

3)equity multiplier= total asset /total equity

           = 27000/13000

        = 2.077

**Liabilities for 2011 = 1000+11000+2000=14000

equity = 27000-14000 = 13000

ROE = .10*.44*2.077

Correct optiton is "B"