Question

Y3K, Inc., has sales of $4,500, total assets of $3,300, and a debt?equity ratio of 1.50. If its return on equity is 17 percent, what its net income?

rev: 09_17_2012

$561.00

$164.56

$765.00

$224.40

$59.84

Answer 1

As per DuPont Identity,

ROE = Net Profit Margin x Assets Turnover Ratio x Financial Leverages

         = Net Profit Margin x Sales/Total assets x Equity multiplier

Net Profit Margin = (ROE x Total assets) / [Sales x (1 +D/E)]

                                 = 0.17 x $ 3,300 / [$ 4,500 x (1+1.5)]

                                 = $ 561 / ($ 4,500 x 2.5)

                                 = $ 561/$ 11,250

                                  = 0.049866667

Profit Margin = Net Income/Sales

Net Income = Profit Margin x Sales

                  = 0.049866667 x $ 4,500 = $ 224.40

Hence option “$ 224.40” is correct answer.