Last year, PJ's Ice Cream Parlours, 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 ROE (Return on Equity) is calculated as Net Income / Equity. Given ROE = 12% and the debt ratio = 40%, the equity ratio is 60%. The capital intensity ratio is 0.75, meaning Total Assets = 0.75 * Sales = 0.75 * $25m = $18.75m. Equity = 60% of Total Assets = 0.6 * $18.75m = $11.25m. Therefore, Net Income = ROE * Equity = 0.12 * $11.25m = $1.35m.

Last Year, PJ's Ice Cream Parlours, Inc