Question

Diamond Eyes, Inc.. has sales of $18 million, total assets of $15.6 million, and total debt of $6.3 million. If the profit margin is 8%, what is the net income? What is ROA? What is ROE?

Answer 1

Answer:

a). The net income=$1.44 million

b). ROA=0.0923

c). ROE=0.155

Explanation:

a)

Step 1

The expression for the net income is as follows;

profit margin=net income/net sales

where;

net income=total revenue-expenses

total revenue is the capital generated from the operations of a business and

expenses is the cost that goes directly into the generation of revenue

In our case;

profit margin=8%=8/100=0.08

net income=unknown=i

net sales=$18 million

replacing;

0.08=i/18 million

i=18 million×0.08=$1.44 million

The net income=$1.44 million

b).

ROA is a financial ratio that can be expressed as;

ROA=net income/total assets

where;

ROA=return on asset

net income=$1.44 million

total assets=$15.6 million

replacing;

ROA=(1.44/15.6)=0.0923

ROA=0.0923

c).

ROE is a financial ratio that can be expressed as;

ROE=net income/shareholders equity

where;

ROE is the return on equity

net income=$1.44 million

shareholders equity=Assets-debt

and;

assets=$15.6 million

debt=$6.3 million

shareholders equity=(15.6-6.3)=9.3 million

replacing;

ROE=1.44 million/9.3 million

ROE=0.155