Question

Problem 3-17 DuPont Identity [LO 3]

Bethesda Mining Company reports the following balance sheet information for 2015 and 2016.

BETHESDA MINING COMPANY Balance Sheets as of December 31, 2015 and 2016
	2015				2016					2015				2016
Assets									Liabilities and Owners’ Equity
Current assets									Current liabilities
Cash	$	52,990			$	67,084			Accounts payable	$	189,422			$	197,111
Accounts receivable		62,781				83,139			Notes payable		84,520				136,088
Inventory		122,559				188,119			Total	$	273,942			$	333,199
Total	$	238,330			$	338,342			Long-term debt	$	236,000			$	172,750
									Owners’ equity
									Common stock and paid-in surplus	$	219,000			$	219,000
Fixed assets									Accumulated retained earnings		167,635				203,121
Net plant and equipment	$	658,247			$	589,728			Total	$	386,635			$	422,121
Total assets	$	896,577			$	928,070			Total liabilities and owners’ equity	$	896,577			$	928,070

Suppose that the Bethesda Mining Company had sales of $2,266,873 and net income of $98,381 for the year ending December 31, 2016.
  
Calculate ROE using the DuPont identity. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter the profit margin and return on equity as a percent.)

Profit margin		%
Total asset turnover		times
Equity multiplier		times
Return on equity		%

Answer 1

Profit margin = Net Income Sales

Profit margin = $98,381    $2,266,873

Profit margin = 4.34%

_______________________________________________________

Total asset turnover = Sales Average Total assets

Average Total assets = ( $ 896,577 + $ 928,070 ) 2

Average Total assets = $ 912,323.50

Total asset turnover = $2,266,873   $ 912,323.50

Total asset turnover = 2.48 times

Equity multiplier =  Average Total assets Common equity

Equity multiplier =  $ 912,323.50 219,000

Equity multiplier = 4.17

Return on equity = net profit margin x total asset turnover ( common equity / total assets)

Return on equity = 0.0434 x 2.48 ( 219,000 / $ 912,323.50 )

Return on equity = 44.85%

answered by: anonymous