1. DuPont Identity If Jares, Inc., has an equity multiplier of 1.
55, total asset turnover of
1.75, and a profit margin of 4.3 percent, what is its ROE?
Given that,
Equity multiplier (EM) = 1.55
Total Asset turnover = 1.75
Profit margin = 4.3
ROE =?
ROE = Profit margin X Total Asset turnover X Equity multiplier (EM)
= 4.3% X 1.75 X 4.3
= 11.6638%
Book
ROE = (PM) (TAT) (EM)
ROE = (.043) (1.75) (1.55) = .1166 or 11.66%
2. Equity Multiplier and Return on Equity Nuber Company has a debt–equity ratio of
.80. Return on assets is 9.7 percent, and total equity is $735,000. What is the equity
multiplier? Return on equity? Net income?
Given that,
Return on Assets (ROA) = 9.7 = 0.097%
Debt-equity ratio = 0.80
Total equity = $ 73,500
EM =? ROE =? Net income =?
EM = 1 + debt equity ratio
= 1 + 0.80
= 1.8
ROE = ROA X Equity multiplier (EM)
= 0.097 X 1.8
= 17.46%
Net income = ROE X total equity
= 17.46 X 73,500
= 1283310
Book
The equity multiplier is:
EM = 1 + D/E
EM = 1 + 0.80 = 1.80
One formula to calculate return on equity is:
ROE = (ROA) (EM)
ROE = 0.097(1.80) = .1746, or 17.46%
ROE can also be calculated as:
ROE = NI / TE
So, net income is:
NI = ROE (TE)
NI = (.1746) ($735,000) = $128,331
3. Using the DuPont Identity Y3K, Inc., has sales of $2,700, total assets of $1,310, and a
debt-equity ratio of 1.20. If its return on equity is 15 percent, what is its net income?
Given that,
Sales = $ 2700
Total Assets = $ 1.310
Debt equity Ratio= 1.20
ROE = 15%
NI =?
EM = 1 + debt equity ratio
= 1 + 1.20
= 2.2
ROE = ROA X EM
Or, ROA = ROE/EM
Or, ROA = 0.15/2.2
ROA = 0.0681812 = 6.8182%
NI = ROA X TA
= 0.0681812 X 1310
= 89.3182%
04. EFN the most recent financial statements for Martin, Inc. are shown here:
Income Balance
Statement Sheet
Sales $ 37,300 Assets $ 127,000 Debt $ 30,500
Costs 25,800 Equit 96,500
y
Taxable $ 11,500 Total $ 127,000 $ 127,000
income Total
Taxes 3,910
(34%
)
Net income $ 7,590
Assets and cost are proportional to sales. Debt and equity are not. A dividend of $ 2,500 was
paid. And Martin wishes to maintain a constant payout ratio. Next year’s sales are projected
to be $ 42,300. What external financing in needed?
An increase of sales to $42,300 is an increase of:
Sales increase = ($42,300 – 37,300) / $37,300
Sales increase = .1340, or 13.40%
Pro forma income statement
Sales $42,300.00
Costs 29,258.45
EBIT 13,041.55
Taxes (34%) 4,434.13
Net income $ 8,607.43
Pro forma balance sheet
Assets $ 144,024.13
Total $ 144,024.13
Debt $ 30,500.00
Equity 102,272.31
Total $132,772.31
The payout ratio is constant, so the dividends paid this year is the payout ratio from last year
times net income, or:
Dividends = ($2,500 / $7,590) ($8,607.43)
Dividends = $2,835.12
The addition to retained earnings is:
Addition to retained earnings = $8,607.43 – 2,835.12
Addition to retained earnings = $5,772.31
And the new equity balance is:
Equity = $96,500 + 5,772.31
Equity = $102,272.31
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $144,024.13 – 132,772.31
EFN = $11,251.82
06. Sustainable Growth If the Layal Corp. has a 13 percent ROE and a 20 percent payout
ratio, what is its Sustainable Growth?
b = 1 – Payout rate
= 1 – 0.20
= 0.80
Now we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]
Sustainable growth rate = [.13(.80)] / [1 – .13(.80)]
Sustainable growth rate = .1161 or 11.61%
07. Sustainable Growth assuming the following ratios are constant, what is the
Sustainable Growth?
ROE = (PM (TAT) (EM) [Profit margin X Total Asset turnover X Equity multiplier (EM)]
ROE = (.074 (2.20) (1.40)
ROE = .2279 or 22.79%
The plowback ratio is one minus the dividend payout ratio, so:
b = 1 – .40
b = .60
Now, we can use the sustainable growth rate equation to get:
Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]
Sustainable growth rate = [.2279(.60)] / [1 – .2279(.60)]
Sustainable growth rate = .1584 or 15.84%
08. Calculating EFN: The most financial statements for Bardley, Inc. are shown here (assuming
to taxes)
Income Statement Balance Sheet
Sales $ 6,500 Assets $ 17,400 Debt $ 8,400
Costs 5,320 Equity 9,000
Net $ 1,180 Total $ 17,400 Total $
income 17,400
Assets and cost are proportional to sales. Debt and equity are not. No dividend are paid. Next
year’s sales are projected to be $ 7,280. What is the external financing needed?
An increase of sales to $7,280 is an increase of:
Sales increase = ($7,280 – 6,500) / $6,500
Sales increase = .12, or 12%
Assuming costs and assets increase proportionally, the pro forma financial statements will look
like this:
Pro forma income statement
Sales $ 7,280
Costs 5,958
Net income $ 1,322
Pro forma balance sheet
Assets $ 19,488
Total $ 19,488
Debt $ 8,400
Equity 10,322
Total $ 18,722
If no dividends are paid, the equity account will increase by the net income, so:
Equity = $9,000 + 1,322
Equity = $10,322
So the EFN is:
EFN = Total assets – Total liabilities and equity
EFN = $19,488 – 18,722 = $766
