Question

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 67.5%. Based on the DuPont equation, what was the ROE?

Answer 1

Answer:

The ROE was 23.33%

Explanation:

To calculate the ROE, first we have to calculate the next:

1) Total asset turnover=Sales/Total assets

=(325000/250,000)=1.3

2) Debt to total asset=Debt/Total assets

Hence debt=0.675*$250,000=$168,750

3) Total assets=Total liabilities+Total equity

Total equity=($250,000-$168,750)=$81,250

4) Equity multiplier=Total assets/Equity

=$250,000/$81,250=3.07(Approx)

5) Profit margin=Net income/Sales

=(19000/325000)=5.84615385%(Approx)

Finally we have to calculate the ROE

ROE=Profit margin*Total asset turnover*Equity multiplier

=5.84615385*3.07*1.3

= 23.33% Approx