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Following information for company XYZ in 2015 is given: sales $550 000, cost $332 000, depreciation...

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Finance

Following information for company XYZ in 2015 is given: sales$550 000, cost $332 000, depreciation expense $120 000, interestexpense 60 000, dividends 16 000, tax rate 35% percent.

a) prepare income statement

b) calculate company XYZ profit margin

c) If company XYZ has total assets $250 000 and equitymultiplier 2.5. What is return on equity (ROE) based on DuPointidentity?

d) Discuss the three components of DuPoint identity

Answer & Explanation Solved by verified expert
4.0 Ratings (436 Votes)

a:

Income Statement
Sales 550000
Less: Cost 332000
Gross Profit 218000
Less:
depreciation expense 120000
EBIT 98000
Less: Interest 60000
Profit before tax 38000
Less: Tax 13300
Net Income 24700
Less: Dividend 16000
Amount transferred to retained earnings 8700

b:

Profit margin= net income/ sales

= 24700/550000

= 4.49%

C:As per Dupont equation

ROE = profit margin* sales /Total assets* equity multiplier

= 4.49%*550000/250000 * 2.5

=24.7%

D: the return on equity is determined by multiplying profit margin, total asset turnover and equity multiplier. Net profit margin is the percentage of profits earned on total sales. Total asset turnover is an efficiency ratio which determines the efficiency of assets in generating sales. It is calculated as sales/ total assets. The equity multiplier is a financial leverage ratio which measures the amount of total assets financed by equity.
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Transcribed Image Text

Following information for company XYZ in 2015 is given: sales$550 000, cost $332 000, depreciation expense $120 000, interestexpense 60 000, dividends 16 000, tax rate 35% percent.a) prepare income statementb) calculate company XYZ profit marginc) If company XYZ has total assets $250 000 and equitymultiplier 2.5. What is return on equity (ROE) based on DuPointidentity?d) Discuss the three components of DuPoint identity

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