We'll first start with the given information:
- Sales of Y3K, Inc. are $4,600
- Total assets of Y3K, Inc. are $3,225
- The firm has a debt-equity ratio of 1.60
- And the return on equity is 11 percent or 0.11
We will use the DuPont Identity to solve this problem. The DuPont Identity is a fundamental financial formula that states:
ROE = Net Income / Shareholder's Equity = Net Income / Sales * Sales / Total Assets * Total Assets / Shareholder's Equity.
This can be further broken down into:
ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
Where Profit Margin is Net Income divided by Sales, Total Asset Turnover is Sales divided by Total Assets, and Equity Multiplier is Total Assets divided by Shareholder's Equity.
First, we can calculate the Equity Multiplier using the debt-equity ratio. The relationship can be defined as:
Equity Multiplier = 1 + Debt-Equity Ratio
Here, Debt-Equity Ratio is 1.60, thus Equity Multiplier is 1 + 1.60 = 2.6.
Next, we calculate the Total Asset Turnover which is Sales divided by Total Assets.
Total Asset Turnover = $4,600 / $3,225 = 1.426.
Once we have the Equity Multiplier and Total Asset Turnover, we can solve for the Profit Margin. We rearrange the DuPont Identity to get Profit Margin on one side:
Profit Margin = Return on Equity / (Total Asset Turnover * Equity Multiplier).
Substitute the values into the equation:
Profit Margin = 0.11 / (1.426 * 2.6) = 0.02966.
Finally, we can calculate the Net Income using the formula:
Net Income = Profit Margin * Sales
Substitute the values into the equation:
Net Income = 0.02966 * $4,600 = $136.44.
So, the Net Income of Y3K, Inc. is approximately $136.44 and matches with option C.
Answer: C. $136.44