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Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of...

Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $245,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed? Select the correct answer. a. 5.20% b. 4.36% c. 4.78% d. 4.99% e. 4.57%

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Answer #1

The above data pertains to du pont analysis. Du pont analyis is nothing but breaking up of ROE into 3 components

Du Pont Analysis = Net Profit Margin * Asset Turnover * Equity Multiplier

= (Net Income / Revenue) * (Revenue / Total assets) * (Total assets / Shareholder's equity)

= 10,549 / 245,000 * 1.33 * 1.75 = 0.1002155 = 10.02% Approx

If net income had increased by 5,250 without changing the sales, assets or capital structure

New ROE = (10,549 + 5250) / 245,000 * 1.33 * 1.75 = 0.1501 = 15.01% Approx

Change in ROE = 15.01 - 10.02 = 4.989% = 4.99%

Option (d) is the answer

If any query please comment. I will reply in the comments

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