Question

Last year Coral Gables Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total debt ratio was 60.0%. Based on the DuPont equation, what was the ROE

Answer 1

Answer:

19%

Explanation:

Given: Sales: $325000

           Net Income: $19000

           Total asset: $250000.

            Total debt ratio= 60%

Remember; Dupoint equation´s ROE= $Profit\ margin\times total\ asset\ turnover\times equity\ multiplier$

Now let´s find out total liability.

We know, Total liability= $Dabt\ ratio\times total\ asset$

⇒  Total liability=  $0.60\times 250000$

∴ Total liability= $150000.

Now, finding return on asset.

We know, return on asset= $\frac{Net\ income}{Total\ asset}$

⇒  return on asset= $\frac{19000}{250000}$

∴ return on asset (ROA)= 0.076

Next finding equity multilier.

Shareholder´s equity= $Total\ asset - Total\ liability$

⇒ Shareholder´s equity= $250000-150000= \ 100000$

∴  Shareholder´s equity= $100000.

Equity multipier= $\frac{Total\ asset}{Sharesholder\ equity}$

⇒ Equity multipier=  $\frac{250000}{100000}$

∴ Equity multipier=  2.5

Finally, based on the DuPont equation. Finding return on equity (ROE).

ROE= $ROA\times Equity\ multiplier$

⇒ ROE= $0.076\times 2.5\times 100$

∴  ROE= $19\%$

Return on equity ratio is calculated to know how much profit a company can make out of investor´s money. Dupoint analysis is the method to analyze company´s ability to increase it´s ROE.