Question

California Covertibles has sales of $11,655,000, an ROE of 17.64%, and a total asset turnover of 2.89 times. What is the company’s net income if the firm has a debt-to-equity ratio of 1.43?

Answer 1

Answer: $292,754.76

Explanation:

The company's net income will be calculated thus:

First, we need to know the asset invested which will be:

Asset turnover = Net sales / Asset invested

2.89 = 11,655,000 / Asset

Asset invested = 11,655,000 /2.89

Asset invested = $4,032,871.97

Then, the weight of equity will be:

= 1 / (1+1.43)

= 1 /2.43

= 0.41152

Then, the equity will be:

= $4,032,871.97 × 0.41152

= $1,659,607.47

ROE = Net income / Equity

17.64% = Net income/Equity

0.1764 = Net Income / 1,659,607.47

Therefore, Net income will be:

= $1,659,607.47 × 0.1764

= $292,754.76