Question

Last year Packages had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm's total-debt-to-total-assets ratio was 45.0%. a. Based on the DuPont equation, what was the ROE? (Hint: use the firm's debt ratio to solve for total debt. Once you have total debt, you can calculate owner's equity. Owner's equity is required to solve for the equity multiplier of the firm.) b. Suppose the firm reduces its equity multiplier (EM) by 10%, what effect will it have on ROE? Do you think the firm took the right action by reducing equity multiplier? Explain in detail the effects of reducing EM on ROE, and under what circumstances such actions are beneficial for the firm and how?

          Last year Packages had sales of $325,000 and a net income of $19,000, and its year-end
assets were $250,000. The firm's total-debt-to-total-assets ratio was 45.0%.
a. Based on the DuPont equation, what was the ROE? (Hint: use the firm's debt ratio
to solve for total debt. Once you have total debt, you can calculate owner's
equity. Owner's equity is required to solve for the equity multiplier of the firm.)
b. Suppose the firm reduces its equity multiplier (EM) by 10%, what effect will it
have on ROE? Do you think the firm took the right action by reducing equity
multiplier? Explain in detail the effects of reducing EM on ROE, and under what
circumstances such actions are beneficial for the firm and how?

Last year Packages had sales of 325,000 and a net income of19,000, and its year-end
assets were 250,000. The firm's total-debt-to-total-assets ratio was 45.0%.
a. Based on the DuPont equation, what was the ROE? (Hint: use the firm's debt ratio
to solve for total debt. Once you have total debt, you can calculate owner's
equity. Owner's equity is required to solve for the equity multiplier of the firm.)
b. Suppose the firm reduces its equity multiplier (EM) by 10%, what effect will it
have on ROE? Do you think the firm took the right action by reducing equity
multiplier? Explain in detail the effects of reducing EM on ROE, and under what
circumstances such actions are beneficial for the firm and how?

Added by Brenda D.

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