Last year, PJ's Ice Cream Parlors, Inc. reported an ROE = 12 percent. The firm's debt ratio was 40 percent, 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 Return on Equity (ROE) is calculated as Net Income divided by Equity. Given ROE = 12%, we can express this as Net Income / Equity = 0.12. The debt ratio is 40%, meaning equity is 60% of total assets. The capital intensity ratio is 0.75, meaning total assets are 0.75 times sales. Therefore, Total Assets = 0.75 * $25 million = $18.75 million. Equity = 60% of $18.75 million = $11.25 million. Using the ROE formula: Net Income = 0.12 * $11.25 million = $1.35 million.

Last Year, PJ's Ice Cream Parlors, Inc