Question

Coca Inc. has net income of $60,000. The collection period (based on sales) for its account...

Coca Inc. has net income of $60,000. The collection period (based on sales) for its account receivables is 23 days. Total assets are $400,000, total account receivables are $60,000 and its debt-equity ratio is 1.5. What is Coca ROE?

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Answer #1

AVERAGE COLLECTION PERIOD = 365 DAYS X ACCOUNTS RECEIVABLE/SALES

23 = 365 X 60000/ SALES

SALES = 365 X 60000/23 = 952173.91

PROFIT MARGIN = NET INCOME/SALES * 100 = 60000/952173.91*100 6.301%

TOTAL ASSETS TURNOVER = SALES /TOTAL ASSETS = 952173.91/400000 = 2.38

EQUITY MULTIPLIER = ASSETS/ EQUITY = (EQUITY + DEBT)/ EQUITY = 1 + (DEBT/EQUITY) = 1+ 1.5 = 2.5

ROE = PROFIT MARGIN X TOTAL ASSETS TURNOVER X EQUITY MULTIPLIER

ROE = 6.301 % X 2.38 X 2.5 = 37.49%

NOTE : TAKEN 365 DAYS IN CALCULATING SALES

ANY DOUBTS, FEEL FREE TO ASK

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