Question

ZZR has a turnover of $10,000 and total assets of $5,000 while its debt-equity ratio is 0.5. If its rate of return on equity is 17%, what is its net income?

Answer 1

Sol:

Sales = $10,000

Total assets = $5000

Debt-Equity ratio = 0.5

Rate of return on equity (ROE) = 17%

To determine net income:

Equity multiplier = 1 + Debt−Equity ratio

Equity multiplier = 1 + 0.50

Equity multiplier = 1.50

Total Asset turnover = Sales / Total Assets

Total asset turnover = $10,000 / $5000

Total asset turnover = 2 times

ROE = Profit margin x Total asset turnover x Equity multiplier

0.17 = Profit margin x 2 x 1.50

Profit margin = 0.17 / 3

Profit margin = 0.0566667 or 5.67%

Profit margin = Net income / Sales

0.0566667 = Net income / $10,000

Net income = $10,000 x 0.05666667

Net income = $566.67 or rounded off to $567

Therefore net income of the company will be $567