Based on the information in this table the return on equity is a. 6.90% b. 5.47%
ID: 2664166 • Letter: B
Question
Based on the information in this table the return on equity is
a. 6.90%
b. 5.47%
c. 6.66%
d. 3.46%
Johnson Company
Balance Sheet
Assets:
Cash and Marketable Securities $300,000
Accounts receivable 1,215,000
inventories 1,747,500
prepaid expenses 24,000
total current assets 3,286,500
fixed assets 2,700,000
less: accum. depr. 1,087,500
net fixed assets 1,612,500
total assets $4,899,000
Liabilities:
Accounts payable $240,000
Notes payable 825,000
Accrued taxes 42,000
total current liabilities $1,107,000
long term debt 975,000
common stock 100,000 shares 100,000
Retained Earnings 2,717,000
Total liabilities and owners equity $4,899,000
Net sales all credit $6,375,000
Less Cost of goods sold 4,312,500
Selling and administrative expense 1,387,500
Depreciation expense 135,000
interest expense 127,000
Earnings before taxes $412,500
income taxes 225,000
Net income 187,500
Common Stock Dividends $97,500
Change in retained earnings $90,000
Explanation / Answer
ROE can be calculated using the DuPont equation:
ROE = net profit margin x total asset turnover x equity multiplier
equity multiplier = total assets / total equity
total asset turnover = total sales / total assets
net profit margin = net income / revenue (sales)
Which can be simplified to the following:
ROE = net income / total equity
Total equity is the value of stock plus retained earnings. Net income can be found in the given information.
total equity = $100,000 (from shares) + $2,717,000 (RE) = $2,817,000
NI = $187,500
Calculate the final answer.
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