Question

Candy Games Inc. expects the following numbers for next year: - Sales: $56,000,000 - Costs: \$42,000,000 (excluding depreciation) - Depreciation: $5,000,000 - Interest: 2,000,000 - Tax rate 30% - Total assets $113,000,000 - Debt-to-equity ratio: 2 - Net Income: $8,640,000 Part 1 What is the expected return on equity? Hint: Use the Dupont Identity.

Answer 1

The expected return on equity for Candy Games Inc. can be calculated using the Dupont Identity formula, resulting in an ROE of 22.9%.

Step-by-step explanation:

The question asks how to calculate the expected return on equity for Candy Games Inc. using the Dupont Identity, which breaks down return on equity (ROE) into three parts: profit margin, asset turnover, and financial leverage. ROE is a measure of how effectively a company utilizes its equity to generate profits.

To calculate the expected ROE using the provided figures:

• Net Income = $8,640,000
• Sales = $56,000,000
• Total Assets = $113,000,000
• Equity = Total Assets / (1 + Debt-to-Equity Ratio), where Debt-to-Equity Ratio = 2. Therefore, Equity = $113,000,000 / (1+2) = $37,666,667

Using the formula ROE = (Net Income / Sales) × (Sales / Total Assets) × (Total Assets / Equity):

ROE = ($8,640,000 / $56,000,000) × ($56,000,000 / $113,000,000) × ($113,000,000 / $37,666,667) = 0.1545 × 0.4956 × 3 = 22.9%

The expected return on equity for Candy Games Inc. is therefore 22.9%.