Question

SMOLIRA GOLF CORP. 2017 and 2018 Balance Sheets
Assets									Liabilities and Owners’ Equity
	2017				2018					2017				2018
Current assets									Current liabilities
Cash	$	24,056			$	24,200			Accounts payable	$	23,284			$	27,200
Accounts receivable		12,548				15,300			Notes payable		12,000				10,900
Inventory		25,592				27,200			Other		11,671				15,900
Total	$	62,196			$	66,700			Total	$	46,955			$	54,000
									Long-term debt	$	90,000			$	93,294
									Owners’ equity
									Common stock and paid-in surplus	$	42,000			$	42,000
									Accumulated retained earnings		208,936				242,706
Fixed assets
Net plant and equipment	$	325,695			$	365,300			Total	$	250,936			$	284,706
Total assets	$	387,891			$	432,000			Total liabilities and owners’ equity	$	387,891			$	432,000

SMOLIRA GOLF CORP. 2018 Income Statement
Sales					$	336,329
Cost of goods sold						231,000
Depreciation						21,600
Earnings before interest and taxes					$	83,729
Interest paid						14,400
Taxable income					$	69,329
Taxes (21%)						14,559
Net income					$	54,770
Dividends	$	21,000
Retained earnings		33,770

1. a. The total asset turnover is?

b. The equity multiplier isc. Using the DuPont identity the company's ROE is what percent?

Answer 1

Solution:

a. Calculation of Total Assets Turnover :

The formula for calculating the Total asset turnover is :

= Net sales / Average total assets

As per the Information given in the question we have

Net sales for Year 2018 = $ 336,329

Average Total Assets = ( Total assets for the Year 2017 + Total assets for the Year 2018 ) / 2

= ( 387891 + 432000 ) / 2 = $ 819891 /2 = $ 409945.50

Applying the above values in the formula we have

Total assets Turnover = $ 336,329 / $ 409,945.50 = 0.8204

Thus the Total Asset Turnover = 0.8204

b. Calculation of Equity Multiplier :

The formula for calculating the Equity Multiplier is:

= Total Assets / Total Stock holders equity

As per the information given in the question

Total assets for the year 2018 = $ 432,000

Total of stockholder’s equity for the year 2018 = $ 284,706

Thus applying the above values in the formula we have

Equity multiplier = $ 432,000 / $ 284,706 = 1.5174

Thus the Equity multiplier is = 1.5174               

c. Calculation of ROE using the Du Pont Identity :

As per the DuPont identity, the company's ROE is calculated using the following formula :

ROE = Profit margin * Total Asset Turnover * Equity Multiplier

= ( Net Income / Net Sales ) * ( Net sales / Average Total Assets ) * ( Total Assets / Total Equity )

As per the Information given in the question and the calculations above we have

Net Income for the year 2018 = $ 54,770   ; Net sales for the year 2018 = $ 336,329

Total asset turnover = 0.8204

Equity multiplier = 1.5174

Applying the above values in the Du Pont Equation, we have ROE as follows :

= ( 54770 / 336329 ) * 0.8204 * 1.5174

= 0.1628 * 0.8204 * 1.5174

= 0.2027

= 20.27 %

Thus as per the Du Pont Equation ROE = 20.27 % .