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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

DuPONT AND NET INCOME Precious Metal Mining has $17 million in sales, its ROE is 17%, and its total assets turnover is 3.2 ×. 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.

Introduction:

DuPont Analysis:

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

Explanation

Given,

Return on equity is (ROE) 17%.

Calculate net income through ROE:

Formula to calculate return on equity,

Return on Equity=NetIncomeCommonEquity

Substitute 17% for return on equity and $2,656,250 (refer working note) for common equity.

17%=NetIncome$2,656,250NetIncome=17%×$2,656,250=17100×$2,656,250=$451,562.5

Here, net income is $451,562.5.

Working note:

Given,

Sales are $17 million

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