Y3K, Inc., has sales of $6,269, total assets of $2,885, and a debt–equity ratio

Question

Y3K, Inc., has sales of $6,269, total assets of $2,885, and a debt–equity ratio of 1.80. If its return on equity is 12 percent, what is its net income? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Y3K, Inc., has sales of $6,269, total assets of $2,885, and a debt–equity ratio of 1.80. If its return on equity is 12 percent, what is its net income? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

ROE = Profit Margin * Total Asset Turnover * Equity Multiplier (Assets/Equity)

ROE = (Profit Margin) * (Sales/ Total Assets) * (1 + Debt-Equity ratio)

0.12 = Profit Margin * ($6,269/$2,885) * (1 + 1.80)

Profit margin = 0.12 / (2.1730*2.80) = 0.0197

Profit margin = Net income/Sales = 0.0197

Net income / $6,269 = 0.0197

Net income = $6,269 * 0.0197 = $123.50

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