Last year, DJ's Soda Fountains, Inc. reported an ROE = 27 percent. The firm's debt ratio was 50 percent, sales were $9 million, and the capital intensity ratio was 1.5 times. What is the net income for DJ's last year?
A) $1.22m
B) $1.82m
C) $2.43m
D) $2.84m

Question

Quizplus · Accepted Answer

The net income can be calculated using the Return on Equity (ROE) formula: ROE = Net Income / Equity. Given an ROE of 27% and a debt ratio of 50%, the equity ratio is 50% (since Debt Ratio + Equity Ratio = 100%). With a capital intensity ratio of 1.5 times, the total assets are 1.5 * $9m in sales = $13.5m. Therefore, Equity = 50% of total assets = 0.5 * $13.5m = $6.75m. Thus, Net Income = ROE * Equity = 0.27 * $6.75m = $1.8225m, which rounds to $1.82m.

Last Year, DJ's Soda Fountains, Inc