Question

Bethesda Mining Company reports the following balance sheet information for 2018 and 2019.

BETHESDA MINING COMPANY Balance Sheets as of December 31, 2018 and 2019
		2018			2019				2018			2019
Assets							Liabilities and Owners’ Equity
Current assets							Current liabilities
Cash	$	37,354		$	47,940		Accounts payable	$	192,422		$	200,111
Accounts receivable		59,781			80,139		Notes payable		87,520			139,088
Inventory		129,618			196,004
							Total	$	279,942		$	339,199
Total	$	226,753		$	324,083
							Long-term debt	$	242,000		$	178,750
							Owners’ equity
							Common stock and paid-in surplus	$	213,000		$	213,000
							Accumulated retained earnings		149,458			182,562
Fixed assets
Net plant and equipment	$	657,647		$	589,428		Total	$	362,458		$	395,562
Total assets	$	884,400		$	913,511		Total liabilities and owners’ equity	$	884,400		$	913,511

Suppose that the Bethesda Mining Company had sales of $2,206,873 and net income of $104,381 for the year ending December 31, 2019.

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.)

a) profit margin?

b) total asset turnover?

c) equity multiplier?

d) return on equity?

Answer 1

The profit margin is computed as shown below:

= Net income / Sales

= $ 104,381 / $ 2,206,873

= 4.73% Approximately

The total Asset turnover is computed as shown below:

= Sales / Total Assets

= $ 2,206,873 / $ 913,511

= 2.42 times Approximately

Equity Multiplier is computed as follows:

= Total Assets / Total Equity

= $ 913,511 / $ 395,562

= 2.31 times Approximately

Return on equity is computed as follows:

= Profit margin x Total Asset Turnover x Equity Multiplier

= Net income / Sales x Sales / Total Assets x Total Assets / Total Equity

= ($ 104,381 / $ 2,206,873) x ($ 2,206,873 / $ 913,511) x ($ 913,511 / $ 395,562)

= $ 104,381 / $ 395,562

= 26.39% Approximately

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