Question

Last year Harrington Inc. had sales of $325,000 and a net income of $17,000, and its year-end assets were $230,000. The firm's total-debt-to-total-assets ratio was 45.0%.

Based on the DuPont equation, what was the ROE?

Answer 1

13.42%

Step-by-step explanation:

The computation of return on equity is shown below:-

Total asset turnover = Sales ÷ Total assets

= $325,000 ÷ $230,000

= $1.41

Debt to total asset=Debt ÷ Total assets

= 0.45 × $230,000

= $103,500

Total assets =Total liabilities + Total equity

Total equity = $230,000 - $103,500

= $126,500

Equity multiplier =Total assets ÷ Equity

= $230,000 ÷ $126,500

= 1.82 approx

Profit margin=Net income ÷ Sales

= $17,000 ÷ $325,000

= 5.230% approx

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

= 5.230%× 1.82 × 1.41

= 13.42%