Following information for company XYZ in 2015 is given: sales $550 000, cost $332 000, depreciation expense $120 000, in...
Following information for company XYZ in 2015 is given: sales $550 000, cost $332 000, depreciation expense $120 000, interest expense 60 000, dividends 16 000, tax rate 35% percent.
a) prepare income statement
b) calculate company XYZ profit margin
c) If company XYZ has total assets $250 000 and equity multiplier 2.5. What is return on equity (ROE) based on DuPoint identity?
d) Discuss the three components of DuPoint identity
Homework Answers
a:
| Income Statement | |
| Sales | 550000 |
| Less: Cost | 332000 |
| Gross Profit | 218000 |
| Less: | |
| depreciation expense | 120000 |
| EBIT | 98000 |
| Less: Interest | 60000 |
| Profit before tax | 38000 |
| Less: Tax | 13300 |
| Net Income | 24700 |
| Less: Dividend | 16000 |
| Amount transferred to retained earnings | 8700 |
b:
Profit margin= net income/ sales
= 24700/550000
= 4.49%
C:As per Dupont equation
ROE = profit margin* sales /Total assets* equity multiplier
= 4.49%*550000/250000 * 2.5
=24.7%
D: the return on equity is determined by multiplying profit margin, total asset turnover and equity multiplier. Net profit margin is the percentage of profits earned on total sales. Total asset turnover is an efficiency ratio which determines the efficiency of assets in generating sales. It is calculated as sales/ total assets. The equity multiplier is a financial leverage ratio which measures the amount of total assets financed by equity.
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