Simplified 2017 Income Statement Simplified 2017 Balance She

Simplified 2017 Income Statement:

Simplified 2017 Balance Sheet

Management has determined that last year’s ROE (i.e., in 2017) was unacceptable as it disappointed shareholders. Now, management wants to increase ROE to 20%. Use the DuPont Decomposition to determine the net profit margin that will be required to achieve this ROE target. Assume all other ratios in the Dupont Decomposition are held constant. Please show work.

Solution

Answer:

ROE = Net Income / Shareholders Equity

20% = X / (2500 + 1020 )

X     = 3520 x 20% = $704

Net Profit Margin = $704 / $7500 = 9.39%