Wittels Corporation has provided the following data: In Year 2, the company's net operating income was $42,571, its net income before taxes was $21,571, and its net income was $15,100. The company's equity multiplier is closest to:
A)1.14
B)0.53
C)0.88
D)1.87

Question

Wittels Corporation has provided the following data:  In Year 2, the company's net operating income was $42,571, its net income before taxes was $21,571, and its net income was $15,100. The company's equity multiplier is closest to:
A)1.14 
B)0.53 
C)0.88 
D)1.87

Quizplus · Accepted Answer

The equity multiplier can be calculated using the DuPont formula:

Equity Multiplier = Total Assets / Shareholders' Equity 
Total Assets / Sales * Sales / Net Income Before Taxes * Net Income Before Taxes / Net Operating Income * Net Operating Income / Sales * Sales / Shareholders' Equity

We are given net operating income, net income before taxes, and net income for Year 2. We can use this information along with the following relationships:

Net Income Before Taxes = Net Operating Income - Interest Expense 
Net Income = Net Income Before Taxes - Taxes

From the given data, we can calculate the following:

Interest Expense = Net Operating Income - Net Income Before Taxes = $42,571 - $21,571 = $21,000 
Taxes = Net Income Before Taxes - Net Income = $21,571 - $15,100 = $6,471

We can now calculate the equity multiplier:

Equity Multiplier = Total Assets / Shareholders' Equity 
Total Assets / Sales * Sales / Net Income Before Taxes * Net Income Before Taxes / Net Operating Income * Net Operating Income / Sales * Sales / Shareholders' Equity

We do not have information on sales or total assets, so we cannot calculate the equity multiplier directly. However, we do know that:

Total Assets = Shareholders' Equity + Total Debt

We can rearrange this equation to solve for Shareholders' Equity:

Shareholders' Equity = Total Assets - Total Debt

We do not have information on total debt, but we can use the following relationship:

Total Debt / Total Assets = 1 - Equity Multiplier

We can rearrange this equation to solve for the equity multiplier:

Equity Multiplier = 1 - Total Debt / Total Assets

Substituting our equations for total assets and shareholders' equity:

Equity Multiplier = 1 - Total Debt / (Shareholders' Equity + Total Debt) 
Equity Multiplier = 1 - Total Debt / (Total Assets)

We do not have information on total debt or total assets, but we can make a reasonable assumption that the company's total debt did not change significantly between Year 1 (the base year for the DuPont analysis) and Year 2. This assumption allows us to use the equity multiplier from Year 1 as an estimate for Year 2.

From the provided data, we are given:

Net Income Before Taxes / Net Operating Income = 0.505 
Net Operating Income / Sales = 0.591 
Sales / Shareholders' Equity = 2.10

Using these values, we can calculate the equity multiplier from Year 1:

Equity Multiplier = 1 / (0.505 * 0.591 * 2.10) = 1.86

Therefore, the answer is D) 1.87.

Wittels Corporation Has Provided the Following Data: in Year