DuPont Identity. X Corp. has net income of $20 million, Sales of $200 million, asset turnover of .5, and debt-equity ratio of 30%. a. What is its return on equity? b. If X increases its debt-equity ratio to 50%, what happens to its return on equity?
Return on equity(ROE)= Net profit margin * Asset turnover * leverage
net profit margin= net income/Sales=20/200=10%
leverage = Assets/Equity= 30+70/70=1.43
ROE = 10% * 0.5 * 1.43 = 7.15 %
ROE when Debt to equity = 50 %
Assets/ Equity = 100/50 = 2
ROE= 10% * 0.5 * 2 = 10 %