Y3K, Inc., has sales of $4,500, total assets of $2,820, and a debt−equity ratio of 1.40. If its return on equity is 20 percent, what its net income?

Y3K, Inc., has sales of $4,500, total assets of $2,820, and a debt−equity ratio of 1.40. If its return on equity is 20 percent, what its net income?

rev: 09_17_2012

	$564.00
	$147.27
	$235.00
	$900.00
	$87.73

This is a multi-step problem involving several ratios. The ratios given are all part of the DuPont Identity. The only DuPont Identity ratio not given is the profit margin. If we know the profit margin, we can find the net income since sales are given. So, we begin with the DuPont Identity:

ROE = 0.20 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E)

Solving the DuPont Identity for profit margin, we get:

PM = [(ROE)(TA)] / [(1 + D/E)(S)]

PM = [(0.20)($2,820)] / [(1 + 1.40)($4,500)] = 0.0522

Now that we have the profit margin, we can use this number and the given sales figure to solve for net income:

PM = 0.0522 = NI / S

NI = 0.0522($4,500) = $235.00