Last year Harrington Inc.had sales of $325,000 and a net income of $19,000,and its year-end assets were $250,000.The firm's total-debt-to-total-capital ratio was 47.5%.The firm finances using only debt and common equity,and its total assets equal total invested capital.Based on the DuPont equation,what was the ROE? Do not round your intermediate calculations.
A) 17.08%
B) 11.29%
C) 14.48%
D) 14.91%
E) 13.03%

Question

Quizplus · Accepted Answer

The DuPont equation is ROE = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity). Given that Net Income = $19,000, Sales = $325,000, and Assets = $250,000, we first find the profit margin, asset turnover, and equity multiplier. Profit margin = $19,000 / $325,000 = 0.05846 or 5.846%. Asset turnover = $325,000 / $250,000 = 1.3. The total-debt-to-total-capital ratio is given as 47.5%, which means Debt/Capital = 0.475, where Capital = Debt + Equity. Rearranging, we get Equity/Capital = 1 - 0.475 = 0.525. Since Total Assets = Total Capital and Assets = Equity + Debt, the equity multiplier, which is Assets/Equity, can be found as 1 / 0.525 = 1.90476. Therefore, ROE = 0.05846 * 1.3 * 1.90476 = 0.1448 or 14.48%.

Last Year Harrington Inc