Question

Problem 4-6: DuPont and ROE A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it has total assets of $50 million. What is its ROE? Problem 4-13: Return on equity Midwest Packaging's ROE last year was only 3%, but its management has developed a new operating plant that calls for a total debt ratio of 60%, which will result in annual interest charges of $300,000. Management projects an EBIT of $1,000,000 on sales of $10,000,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the tax rate will be 34%. If the changes are made, what will be the company's return on equity?

Answer 1

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? v 1 01:59 ENG 22-02-2020 14 EQ1022 - X fix E EKELEMEN EO EPEQERES ROE = ROE = PROFIT MARGIN X ASSETS TURNOVER X EQUITY MULTIPLIER 2% X 2 X 2 = ANS 4-6 MIDWEST PACKAGING SALES GIVEN 10000000 1014 1015 1016 1017 1018 1019 1020 1021 1022 1023 1024 1025 1026 1027 1028 1029 1030 1031 1032 1033 1034 1035 1036 EBIT INTEREST EBT TAX NET INCOME 1000000 300000 700000 238000 462000 34% PROFIT MARGIN 4.62% [462000/10000000] ASSETS TURNOVER RATIO = DEBT TO CAPITAL RATIO = THAT MEANS EQUITY = EQUITY MULTIPLIER = 1 + DEBT/EQUITY = 0.6 0.4 2.500 (1 + (0.6/0.4)] REVISED ROE = REVISED ROE = PROFIT MARGIN X ASSETS TURNOVER X EQUITY MULTIPLIER 4.62% X 2 X 2.5 = 23.10% ANS 4 -13 1037 1038 ... CASH BUDGET budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont ... :