Question

3. Oscar's Dog House has net profit of $56,000 and sales of 1,000,000.   It has total asset of $8,000,000. Its book value / equity is $5,300,000 and it pays out pays out 35% of earnings as dividend.

a) What’s its net profit margin, equity multiplier and total asset turnover ratio?

b) What is the return on equity using the DuPont Identity formula?

Answer 1

Sol:

Net profit = $56,000

Sales = $1,000,000

Total assets = $8,000,000

Book value / Equity = $5,300,000

a) Net profit margin = Net profit / Sales

Net profit margin = $56,000/$1,000,000 = 5.60%

Equity multiplier = Total assets / Stockholders Equity

Equity multiplier = $8,000,000 / $5,300,000 = 1.51

Total asset turnover ratio = Sales / Total assets

Total asset turnover ratio = $1,000,000 / $8,000,000 = 0.125 times

b) Return on equity (ROE) using the DuPont Identity formula,

ROE = Net profit margin x Equity multiplier x Total asset turnover ratio

ROE = 5.6% x 1.51 x 0.125 = 1.06%