Last year Vaughn Corporation had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000. The firm\'s total-debt-to-total-assets ratio was 42.5%. Bases on the Du Pont equation, what was Vaughn\'s ROE?
Solution
Based on DuPont equation ,
.
Last year Vaughn Corporation had sales of $315-000 and a net income of.docx
1. Last year Vaughn Corporation had sales of $315,000 and a net income of $17,832, and its year-
end assets were $210,000. The firm's total-debt-to-total-assets ratio was 42.5%. Bases on the Du
Pont equation, what was Vaughn's ROE?
Solution
Based on DuPont equation ,
ROE = Profit Margin ( Profit/Sales) * Total Asset Turnover ( Sales/ Assets) * Equity
Multiplier ( Assets /Equity)
= 17832 / 315000 * 315000/ 215000 * 215000/123625
= 0.1442
= 14.42%
Working notes
Debt to Asset ratio = Total Debt / Total Asset
0.425 = Total Debt / 215000
Hence Total debt = 215000 * 0.425 = 91375
Now
Total Assets = Total Liability + Equity
215000 = 91375 + Equity
Hence, equity = 215000 -91375
= 123625