Y3K Inc has sales of 6289 total assets of 2905 and a debtequ

Y3K, Inc., has sales of $6,289, total assets of $2,905, and a debt?equity ratio of 1.5. If its return on equity is 12 percent, what is its net income? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Net income $

Solution

Net income = $139.44

Under DuPont Model

ROE = Profit Margin x Total Asset turnover x Equity Multiplier

= [PM] x [TAT[ x [EM]

= [Profit Margin] x [Sales / Total Asset] x [1 + Debt-Equity Ratio]

By Solving this

Profit Margin = [(ROE x Total Assets] / [(1 + Debt-Equity Ratio) x Sales]

Profit margin = [(0.12 x $2,905)] / [(1+1.50 ) x $6,289]

Profit margin = 0.022172

Then Find the Net income using the Profit Margin ratio formula

Profit Margin = Net Income / Sales

0.022172 = Net Income / $6,289

Net Income = $6,289 x 0.022172

Net Income = $139.44