Question

# Problem 3-17 DuPont Identity [LO 3] Bethesda Mining Company reports the following balance sheet information for...

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 %

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%

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