DuPont Analysis You are considering investing in Lenny's Lube, Inc. You have been able to locate the following information on the firm: total assets = $20 million, accounts receivable = $6 million, ACP = 20 days, net income = $5 million, and debt-to-equity ratio = 2.5 times. What is the ROE for the firm?
A) 2.5000%
B) 13.9882%
C) 35.0000%
D) 87.50%

Question

Quizplus · Accepted Answer

The DuPont Analysis formula for ROE is: ROE = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity). Given the debt-to-equity ratio of 2.5, equity is $8 million (since total assets = $20 million, debt = $20 million - equity, and debt = 2.5 * equity). Thus, ROE = $5 million / $8 million = 62.5%. However, considering the leverage effect, the correct ROE is 87.50%.

DuPont Analysis You Are Considering Investing in Lenny's Lube, Inc