Question

In: Finance

Acme Inc had a total assets turnover of 1.39 and an equity multiplier of 1.75. Although...

Acme Inc had a total assets turnover of 1.39 and an equity multiplier of 1.75. Although it had net income of $11,000 on $295,000 of sales, a private equity firm thinks it could have had a net income $10,750 greater just by cutting costs. If this is possible, how much greater would be the return on equity? (Hint: DuPont!)

8.47%

8.86%

8.09%

9.27%

8.82%

Solutions

Expert Solution

Asset Turn over =Sales/ Assets = 1.39 => Assets = $ 212,230

Equity Multiplier = Asset / equity = 1.75 => equity = $ 121275.22

Liability = 90,955

Return on Equity (ROE)
Total Liabilities (÷) Total Equity (=)
Debt/Equity Ratio
Leverage Ratio
$90,955 $121,275 0.75
Interest Expense (÷) Total Liabilities (=)
Average Interest Rate
AIR
$0 $90,955 0.00%
Return on Assets (+) Return on Assets (-) Average Interest Rate (x) Debt/Equity Ratio (=) Return on Equity
5.18% 5.18% 0.00% 0.75 9.070%

With Increase in Net income to 11000+10500 = 21500

Return on Equity (ROE)
Total Liabilities (÷) Total Equity (=)
Debt/Equity Ratio
Leverage Ratio
$90,955 $121,275 0.75
Interest Expense (÷) Total Liabilities (=)
Average Interest Rate
AIR
$0 $90,955 0.00%
Return on Assets (+) Return on Assets (-) Average Interest Rate (x) Debt/Equity Ratio (=) Return on Equity
10.13% 10.13% 0.00% 0.75 17.928%

Change in Return of equity = 17.928% - 9.070% = 8.86%

Option 2 => 8.86%

jeff jeffy answered 3 years ago
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