Question

In: Finance

Last year FBGS Inc. had sales of $325,000 and a net income of $19,000, and its...

Last year FBGS 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-capital ratio was 15.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE?

Solutions

Expert Solution

Solution :

As per the Du pont Equation

Return on equity = Equity multiplier * Total asset turnover * Profit margin

= ( Assets / Common equity ) * ( Sales / Assets ) * ( Net Income / sales )

As per the information given in the question we have

Assets = $ 250,000   ; Sales = $ 325,000      ; Net Income = $ 19,000

Total assets = Total capital

We know that total assets = $ 250,000 = Total capital

Total debt to total capital ratio = 15.0% = 0.15

The Formula for calculating the total debt to total capital = Total Debt / Total Capital

Thu we have

0.15 = Total Debt / $ 250,000

Total Debt = $ 250,000 * 0.15 = $ 37,500

Further we know that

Debt + Common equity = Total capital

$ 37,500 + Common equity = $ 250,000

Thus Common equity = $ 250,000 - $ 37,500 = $ 212,500

Applying the available information in the ROE Formula we have

= ( $ 250,000 / $ 212,500 ) * ( $ 325,000 / $ 250,000 ) * ( $ 19,000 / $ 325000 )

= 1.176471 * 1.3 * 0.058462

= 0.089412

= 8.9412 %                                                              

= 8.94 % ( when rounded off to two decimal places )

Thus based on the DuPont equation, the ROE = 8.94 %


Related Solutions

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its...
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 62.5%. Based on the DuPont equation, what was the ROE? 21.28% 15.40% 21.48% 20.87% 20.27%
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?
Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets...
Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets equal $8,000,000. The company's ROE was 16%. The company is financed entirely with debt and common equity. What is the company's debt ratio? A. 31.6% B. 3.5% C. 10.9% D. 14.6% E. 64.4%
TSW Inc. had the following data for last year: Net income = $800; Net operating profit...
TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?
firm net profit margin was 6% with its $300,000 net sales last year. Its interest income...
firm net profit margin was 6% with its $300,000 net sales last year. Its interest income was $20,000 and interest expense was $40,000. If its average tax rate was 40%, what was the firm’s operating income last year? A. $40,000 B. $20,000 C. $60,000 D. $50,000 E. $30,000
Last year Meyer Corp had $415,000 of assets, $403,000 of sales, $28,500 of net income, and...
Last year Meyer Corp had $415,000 of assets, $403,000 of sales, $28,500 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total invested capital to $254,000. Sales, costs, and net income would not be affected, and the firm would maintain the same % capital structure but with less total debt. By how much would the reduction...
. In the last month, Cash Is King, Inc. had net income of $10,000, an increase...
. In the last month, Cash Is King, Inc. had net income of $10,000, an increase in a/r of $5,000, a decrease in a/p of $5,000, their inventories rose by $7500, they purchased computers worth $10,000, sold stock worth $100,000, and paid down their bank loans by $50,000. What was their cash flow from each of the following areas: a. Operations b. Investing Activities c. Financing Activities d. What was their total cash flow for the period?
Find the ‘best fit’ equation of net income for last year on last year’s sales. Test...
Find the ‘best fit’ equation of net income for last year on last year’s sales. Test the significance of the overall model at 1% level of significance. Company Market value Sales Profits Assets Recent share price P-E Ratio Yield 1 42926 9663 2446.6 11086 38 18 2.67 2 31557 37799 975.0 38870 47 33 3.76 3 19143 7230 1093.5 9590 59 18 2.85 4 9915 4908 737.6 19429 46 16 6.66 5 9094 989 267.7 1203 30 37 0.00 6...
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of...
Globo-Chem Co. reported net sales of $600 million last year and generated a net income of $132.00 million. Last year’s accounts receivable increased by $17 million. What is the maximum amount of cash that Globo-Chem Co. received from sales last year?
a company has ROE of 22% and last year had $450 million in net income. it...
a company has ROE of 22% and last year had $450 million in net income. it has 200 million shares outstanding and paid a dividend of $.7 per share. what is the company's sustainable growth rate?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT