DuPont Analysis Last year, PJ's Ice Cream Parlors, Inc. reported an ROE = 12%. The firm's debt ratio was 40%, sales were $25 million, and the capital intensity ratio was 0.75 times. What is the net income for PJ's last year?
A) $1.35m
B) $2.40m
C) $3.00m
D) $18.75m

Question

Quizplus · Accepted Answer

The ROE is calculated as Net Income / Equity. With a debt ratio of 40%, the equity ratio is 60%. The capital intensity ratio of 0.75 means assets are 0.75 times sales, so total assets are $18.75m. Equity is 60% of $18.75m, which is $11.25m. With ROE of 12%, Net Income = 12% of $11.25m = $1.35m.

DuPont Analysis Last Year, PJ's Ice Cream Parlors, Inc