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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

DuPONT AND NET INCOME Ebersoll Mining has $6 million in sales, its ROE is 12%, and its total assets turnover is 3.2x. Common equity on the firm’s balance sheet is 50% of its total assets. What is its net income?

Summary Introduction

To determine: Net income.

DuPont Analysis: Under DuPont analysis, return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.

Explanation

Solution:

Given,

Return on equity (ROE) is 12%.

Calculated values (working note),

Common equity is $937,500.

Calculate net income through ROE.

Formula to calculate return on equity,

Return on Equity=NetIncomeCommonEquity

Substitute 12% for return on equity and $937,500 for common equity.

12%=NetIncome$937,500NetIncome=12%×$937,500=12100×$937,500=$112,500

Here, net income is $112,500.

Working note:

Given,

Sales are $6 million

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