Beer Brothers Inc. forecasts that its 2013 year-end assets will be $3,000, its 2

Question

Beer Brothers Inc. forecasts that its 2013 year-end assets will be $3,000, its 2013 sales will be $3,500, its operating costs will be $2,650, its total debt will be $1,115, its interest charges will be $100, and its tax rate will be 40%. Beer uses only debt and common equity in its capital structure. What is Beer's forecasted total assets turnover?

Beer Brothers Inc. forecasts that its 2013 year-end assets will be $3,000, its 2013 sales will be $3,500, its operating costs will be $2,650, its total debt will be $1,115, its interest charges will be $100, and its tax rate will be 40%. Beer uses only debt and common equity in its capital structure. What is Beer's forecasted ROE as estimated using the DuPont equation? Round the ROE to the nearest whole percent.

Explanation / Answer

Beer's forecasted total assets turnover:

Asset Turnover = Sales/Total assets

=3500/3000

=1.167

Beer's forecasted ROE as estimated using the DuPont equation:

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

net profit for the firm = (3500-2650-100)*(1-40%)

=$450

ROE = (450/3500)*(3500/3000)*(3000/1885)

=24%

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