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Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its...

Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s total-debt-to-total-capital ratio was 45.0%. The firm finances using only debt and common equity and its total assets equal total invested capital. Based on the DuPont equation, what was the ROE?

DuPont equation: ROE = profit margin * total asset turnover * equity multiplier
ROE = (NI / Sales) * (Sales / Total assets) * (Total assets / Total common equity)

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Answer #1

ROE = ($19,000 / $325,000) * ($325,000 / $250,000) * 1 / (1 - 45%)

= 13.82%

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