Bethesda Mining Company reports the following balance sheet information for 2015

Question

Bethesda Mining Company reports the following balance sheet information for 2015 and 2016.

Suppose that the Bethesda Mining Company had sales of $2,286,873 and net income of $96,381 for the year ending December 31, 2016.
  
Calculate ROE using the DuPont identity. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. Enter the profit margin and return on equity as a percent.)

BETHESDA MINING COMPANY
Balance Sheets as of December 31, 2015 and 2016 2015 2016 2015 2016 Assets Liabilities and Owners’ Equity Current assets Current liabilities Cash $ 58,042 $ 73,306 Accounts payable $ 188,422 $ 196,111 Accounts receivable 63,781 84,139 Notes payable 83,520 135,088 Inventory 120,205 185,490 Total $ 271,942 $ 331,199 Total $ 242,028 $ 342,935 Long-term debt $ 234,000 $ 170,750 Owners’ equity Common stock and paid-in surplus $ 221,000 $ 221,000 Fixed assets Accumulated retained earnings 173,533 209,814 Net plant and equipment $ 658,447 $ 589,828 Total $ 394,533 $ 430,814 Total assets $ 900,475 $ 932,763 Total liabilities and owners’ equity $ 900,475 $ 932,763

Explanation / Answer

Solution :-

First we can calculate all components

Profit Margin = Net Income / Sales = 96381 / 2286873 = 4.21%

Total Assets turnover = Sales / Total Assets = 2286873 / 932763 = 2.4517 times

Equity Multiplier = Total Assets / Total Equity = 932763 / 430814 = 2.165 times

Now using DuPont identity to calculate ROE we get

ROE = Profit Margin * Total Assets Turnover * Equity Multiplier

ROE = 4.21%*2.4517*2.165 = 22.372%

Hope it will help you and feel free to ask any query through comments.

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