DuPont Analysis 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 DuPont Analysis formula for ROE is: ROE = (Net Income / Sales) * (Sales / Total Assets) * (Total Assets / Equity). Given ROE = 12%, Sales = $25 million, and Capital Intensity Ratio (Sales/Total Assets) = 0.75, we can find Total Assets = Sales / Capital Intensity Ratio = $25m / 0.75 = $33.33m. With a debt ratio of 40%, Equity = Total Assets * (1 - Debt Ratio) = $33.33m * 0.6 = $20m. Using ROE = Net Income / Equity, we find Net Income = ROE * Equity = 0.12 * $20m = $2.4m.

DuPont Analysis Last Year,PJ's Ice Cream Parlors,Inc