Question

Last year Harrington 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-to-total-capital ratio was 17.5%. The firm finances using only debt and common equity, and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE? Do not round your intermediate calculations.

Answer 1

9.21%

Step-by-step explanation:

Given: total assets = $250,000

Total capital = total assets = $250,000

Total debt to total capital ratio = 17.5%

Which means:

Total debt / Total capital = 17.5%

Find total debt:

Total debt = Total capital * 17.5%

= $250,000 * 0.175

= $43,750

Total debt = $43,750

Find total equity:

Total equity = Total capital - Total debt = $250,000 - $43,750 = $206,250

To find the Return on Equity (ROE), use the formula based on Du point:

ROE = Profit margin * Asset turnover * Equity multiplier

= (Net income / Sales ) * ( Sales / Total assets ) * ( Total assets / Total equity)

`= (19000)/(325000) * (325000)/(250000) * (250000)/(206250)`

`= 0.0584615 * 1.3 * 1.21212121`

`= 0.0921`

= 9.21%

ROE = 9.21%