Question

Cash                             10            Acc

Cash                             10            Accounts Payable                       6

Receivables                   12            Notes payable                             8

Inventories                    50            Other Current Liabilities          4

Total CA                        72               Total CL                                 18

                                                                 L-T debt                          78

Net Fixed Assets           44             Common Equity                        20

Total Assets        116      Total L+E                116

  

Income Statement (year ended Dec 31, 2019—in $)

Sales                                                                                                                              2,000

Cost of Goods Sold (materials, labor, heat, light, power, indirect labor, dep.)   500                             

Gross Profit                                                                                                                    1,500

SGA Expenses                                                                                                                    700

            EBIT                                                                                                                       800

Interest Expense                                                                                                    30

            EBT                                                                                                                        770

Taxes (30%)                                                                                                                       231

Net Income                                                                                                                539

Using the data from the balance sheet and income statement above for the FY20 company, calculate the following ratios:

The answers must be carried out to two decimal points.

Profit Margin

ROIC :

Total Debt/Total Capital :

Using the DuPont Equation please calculate the ROE

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Answer #1

Net profit margin = profit /sales = 539/2000 = .2695 or 26.95%

ROIC = operating profit after tax/invested capital

Here invested capital = equity + debt - cash = 20+78-10 = 88

ROIC = 539/88 = 6.125

total debt/total capital = 78/(20+78) = 0.7959

As per DuPont equation ROE = NPM * asset turnover * equity multiplier

where NPM=Net profit margin

Asset Turnover=Sales/assets

Equity Multiplier=Assets/shareholder's equity

In the given question, NPM = 539/2000 ;

assets turnover = 2000/116

Equity multiplier = 116/20

ROE = (539/2000)*(2000/116)*(116/20) = ​26.95

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