Question

YCD, Inc., has sales of $5,783, total assets of $2,604, and a debt-equity ratio of 0.75. If its return on equity is 11 percent, what is its net income?

Answer 1

Answer:Net income=$164

Step-by-step explanation:

Equity multiplier = 1 + Debt-equity ratio

Equity multiplier = 1 + 0.75

Equity multiplier = 1.75

And the total asset turnover is:

Total asset turnover = Sales / Total assets

Total asset turnover = $5,783 / $2,604

Total asset turnover = 2.22 times

ROE = (Profit margin)(Total asset turnover)(Equity multiplier)

0.11 = (Profit margin)(2.22)(1.75)

Profit margin = 0.14/3.885 =0.0283

Rearranging we can find the net income as

Profit margin = Net income / Sales

Net income = profit margin x Sales

Net income =0.0283 x $5,783,= $163.6589 = $164