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 2 years ago
Next > < Previous

Related Solutions

Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of...
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $355,000 and its net income was $10,600. The firm finances using only debt and common equity, and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its...
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of...
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $205,000 and its net income was $10,600. The firm finances using only debt and common equity and its total assets equal total invested capital. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its...
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of...
Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $150,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed? Select the correct answer....
Assume jPhone, Inc., has an equity multiplier of 1.42, total asset turnover of 1.71, and a...
Assume jPhone, Inc., has an equity multiplier of 1.42, total asset turnover of 1.71, and a profit margin of 9 percent. What is its ROE? Select one: a. 15.50% b. 25.50% c. 21.85% d. 21.85 e. 17.95%
AA had a profit margin of 8%, a total assets turnover of 1.5 and an equity...
AA had a profit margin of 8%, a total assets turnover of 1.5 and an equity multiplier of 1.8. 1. Calculate company's ROE . 2. What can you say about this ROE if ROE's Industry Average is 15%
Equity Multiplier (EM) is calculated by Dividing Total Assets bt the Total Equity of the Firm....
Equity Multiplier (EM) is calculated by Dividing Total Assets bt the Total Equity of the Firm. This Ratio is called EM, Because: There is no Reason to call it Equity Multiplier (EM) - It just shows the Total Assets in $ are so many times the Total Amount of Equity in $ (TE) of the Firm. When we Multiply by the Total Asset Turnover  (TATO  of the Firm, we get Return on Equity (ROE) When we Multiply by the Profit Margin (PM)  of...
Dp Jones had a profit margin of 0.05,total assets turnover of 1.7, and an equity multipler...
Dp Jones had a profit margin of 0.05,total assets turnover of 1.7, and an equity multipler of 3.0. Calculate DP Jones return on common equity
Sourstone, Inc., had total assets of $299,000 and equity of $190,000 at the beginning of the...
Sourstone, Inc., had total assets of $299,000 and equity of $190,000 at the beginning of the year. At the end of the year, the company had total assets of $324,000. During the year, the company sold no new equity. Net income for the year was $104,000 and dividends were $50,000.    What is the sustainable growth rate if you calculate ROE based on the end-of-period equity? (Do not round intermediate calculations and enter your answer as a percent rounded to...
A company has a debt-to-equity ratio of 0.62, an asset turnover ratio of 1.39, and a...
A company has a debt-to-equity ratio of 0.62, an asset turnover ratio of 1.39, and a profit margin of 7.8%. The total equity is $ 672,100. What is the amount of net profit?
QUESTION: The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity....
QUESTION: The financial leverage multiplier is the ratio of the firm's total assets to stockholders' equity. ANSWER OPTIONS: True False Please specifically state IN THE SUBJECT LINE if the answer is TRUE or FALSE. Further, discussions should not simply be a restatement of other comments made by students who have previously posted. It is also important to know that if students include the question in their answer response, they should be aware that said text will NOT be included in...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT