A firm reported an ROE of 19 percent. The firm's debt ratio was 45 percent, sales were $12 million, and the capital intensity ratio was 1.1 times. Calculate the net income for the firm.

Question

Quizplus · Accepted Answer

The Return on Equity (ROE) formula is Net Income / Shareholder's Equity. To find the Net Income, we need to rearrange the formula to Net Income = ROE * Shareholder's Equity. The firm's debt ratio is 45%, which means the equity ratio is 55% (100% - 45%). The capital intensity ratio is Total Assets / Sales, so Total Assets = Capital Intensity Ratio * Sales = 1.1 * $12 million = $13.2 million. Shareholder's Equity is therefore 55% of Total Assets, which is 0.55 * $13.2 million = $7.26 million. Finally, Net Income = 19% * $7.26 million = $1.3794 million, which rounds to $1.38 million.

A Firm Reported an ROE of 19 Percent