Question

Y3K, Inc., has sales of $4,600, total assets of $3,425, and a debt-equity ratio of 1.30. If its return on equity is 16 percent, what its net income?

Answer 1

Return on equity is the ratio of net income to the value of equity, and measures dollar return per dollar of shareholders' equity. This rate of return also determines the maximum growth a firm can sustain with its existing capital structure.

Given:

Sales = $4,600

Total Asset = $3,425

DE ratio = 1.30

ROE = 16%

Using Dopont analysis - Net profit margin *Asset Turnover * Equity Multiplier

1) Asset Turnover = Sales/Assets = $4600/$3425 =1.34

2) Equity multiplier = 1+Debt to equity ratio = 1+1.30 = 2.30

3) Profit Margin =RoE/asset turnover *Equity multiplier

=0.16/(1.34*2.30)= 5.19%

4) Net income = Sales * profit margin

= 4600* 0.0519

= 238.80 - answer