A company had a profit margin of 6.1%. The company's net sales were \$3,600,000 and Cost of Goods Sold was \$600,000. If total assets were \$3,450,000 at the beginning of the year and \$4,210,000 at the end of the year, and total equity was \$2,500,000 at the beginning of the year and \$3,100,000 at the end of the year, what is the company's return on equity using the DuPont model?

• A. 7.8%
• B. 8.8%
• C. 5.2%
• D. Not enough information

Answer: (A)

Verified step by step guidance

1. Calculate the Net Income using the profit margin. The formula is: Net Income = Profit Margin * Net Sales. Substitute the given values to find the Net Income.
2. Determine the Average Total Assets for the year. Use the formula: Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2. Substitute the given values to calculate this.
3. Calculate the Average Equity for the year. Use the formula: Average Equity = (Beginning Equity + Ending Equity) / 2. Substitute the given values to find the Average Equity.
4. Compute the Return on Assets (ROA) using the formula: ROA = Net Income / Average Total Assets. Use the Net Income and Average Total Assets calculated in previous steps.
5. Finally, calculate the Return on Equity (ROE) using the DuPont model. The formula is: ROE = (Net Income / Average Equity). Use the Net Income and Average Equity calculated in previous steps to find the ROE.