Etzkorn Corporation\'s year-end assets are $1,650, its sales for the year are $2

Question

Etzkorn Corporation's year-end assets are $1,650, its sales for the year are $2,730, its operating costs are $2,438, its interest charges are $52, and its tax rate is 40%. Its total current liabilities are $300 consisting of $225 of accruals and $75 of notes payable. Its long-term debt is $450. Etzkorn uses only debt and common equity in its capital structure. Using the DuPont equation, what is Etzkorn's ROE rounded to the nearest whole percentage? a. 13% b. 16% c. 14% d. 15% e. 17%

Please also explain how the common equity is figured out.

Explanation / Answer

Total Assets = Total Equity + Total Liability
=> $1,650 = Total Equity + $450 + $300
=> Total Equity = $900

EBT = $2,730 - $2,438 - $52 = $240
Profit = EBT - Tax
=> $240 - ($240 x 40%) = $144

ROE = Profit Margin (i.e. Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

ROE = ($144/$2,730) * ($2,730/$1,650) * ($1,650/$900) = 0.16 or 16%

So, Option B is correct

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