Question

Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000. The firm's total-debt-to-total-assets ratio was 55%. Based on the DuPont equation, what was Vaughn's ROE

Answer 1

18.85%

Step-by-step explanation:

The computation of ROE is seen below

Total asset turnover = Sales ÷ Total assets

= 315,000 ÷ 210,000

= 1.5

Debt to total asset = Debt ÷ Total assets

= 55% × 210,000

= $115,500

Total assets = Total liabilities + Total equity

Total equity = $210,000 - $115,000 = $94,500

Equity multiplier = Total asset ÷ Equity

= 210,000 ÷ 94,500

= 2.222

Profit margin = Net income ÷ Sales

= $17,832 ÷ $315,000

= 5.66%

Therefore

Return on equity = Profit margin × Total asst turnover × Equity multiplier

= 5.66% × 2.22 × 1.5

= 18.85%