Bethesda Mining Company reports the following balance sheet

Bethesda Mining Company reports the following balance sheet information for 2013 and 2014.

Suppose that the Bethesda Mining Company had sales of $2,336,873 and net income of $91,381 for the year ending December 31, 2014.

Calculate ROE using the Du Pont identity. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profit margin and return on equity as percents.)

BETHESDA MINING COMPANY Balance Sheets as of December 31, 2013 and 2014
		2013			2014				2013			2014
Assets							Liabilities and Owners’ Equity
Current assets							Current liabilities
Cash	$	70,322		$	88,509		Accounts payable	$	185,922		$	193,611
Accounts receivable		66,281			86,639		Notes payable		81,020			132,588
Inventory		114,322			178,920
							Total	$	266,942		$	326,199
Total	$	250,925		$	354,068
							Long-term debt	$	229,000		$	165,750
							Owners’ equity
							Common stock and paid-in surplus	$	226,000		$	226,000
							Accumulated retained earnings		187,930			226,197
Fixed assets
Net plant and equipment	$	658,947		$	590,078		Total	$	413,930		$	452,197
Total assets	$	909,872		$	944,146		Total liabilities and owners’ equity	$	909,872		$	944,146
Suppose that the Bethesda Mining Company had sales of $2,336,873 and net income of $91,381 for the year ending December 31, 2014. Required: Calculate ROE using the Du Pont identity. (Do not round intermediate calculations. Round your answers to 2 decimal places (e.g., 32.16). Enter the profit margin and return on equity as percents.) Profit margin ????? %   Total asset turnover ????? times   Equity multiplier ???? times   Return on equity ???? %

Solution

ROE = (net income / sales) * (sales / assets) * (assets / equity) If two companies have the same ROE, but the first is well managed (high net-profit margin) and managed assets efficiently (high asset turnover) but has a low equity multiplier compared to the other company, then an investor is better off investing in the first company, because the capital structure can be changed easily (increase use of debt), but changing management is difficult. 2014 Net income 91381 Sales 2336873 Profit margin is netincome/sales 3.910% Total asset turnover is sales/asset 2.475118255 times Equity multiplier is assets/equity 2.087908589 ROE AS PER FORMULA GIVEN ABOVE IS MULTIPLYING ABOVE 3 COMPONENTS:- 20.208%