Question

Sales = $890,000, total assets = $650,000, debt-equity ratio = 0.40, return on equity = 11.60%. 1) What is the profit margin? 2) What is the return on assets? Please show all steps.

Answer 1

Sales = $890000

Total Assets = 650000

Debt to Equity Ratio = 0.4

RoE = 11.6%

According to Dupont Formula

RoE = Profit Margin * Total Asset Turnover * Equity Multiplier

Equity multiplier = Total Assets / Equity

Equity multiplier = Debt + Equity / Equity

Equity multiplier = (Debt / Equity) + 1

Equity multiplier = 0.4+1= 1.4

So

ROE = 11.6% = Profit margin * (890000 / 650000) * 1.4

Profit margin = 11.6 / ( (890000 / 650000) *1.4)

1. Profit Margin = 6.05%

Profit Margin = Net income / Sales

6.05% = Net income / 890000

So Net income = $53845

Return on Assets = Net income / Assets

Return on Assets = 53845 / 650000

Return on Assets = 8.28%