Question

Using the Du Pont Identity
Y3K, inc. has sales of $3,100, total assets of $1,580, and a debt equity ratio of 1.20. If its return on equity is 16 percent, what is its net income?

Answer 1

The Dupont identity says ROE as:
ROE = (Net Income/Revenues) x (Revenues/Total Assets) x (Total Assets/ Shareholders' Equity)

D/A = (D/E)/(1+(D/E)) = 1.2/(1+1.2) = 0.55
SO Total Debt = 0.55*TA = 0.55*1580 = 869
As D/E = 1.20, E = D/1.20 = 869/1.20 = 724

So we have ROE = (Net Income/Revenues) x (Revenues/Total Assets) x (Total Assets/ Shareholders' Equity)
ie 16% = Net Income/Equity
so Net Income = 16%*Equity = 16%*724 = 115.84 .................Ans