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Last year Gray Corp. had net sales of $325,000 and a net incomeof $19,000, and...

Last year Gray Corp. had net 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-capital ratio was 45.0%. The firm uses only debt and common equity as financing. Based on the DuPont equation, what was the ROE?

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Expert Solution

The ROE is computed as follows:

= (Net income / Net sales) x (Net sales / Assets) x (Assets / Equity)

Equity is computed as follows:

= Assets x (1 - total debt to total capital)

= $ 250,000 x (1 - 0.45)

= $ 137,500

So, the ROE will be as follows:

= ($ 19,000 / $ 325,000) x ($ 325,000 / $ 250,000) x ($ 250,000 / $ 137,500)

= 13.82% Approximately

jeff jeffy answered 2 years ago
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