Question: How do you calculate net income when you only have sales, ROE, asset turnover, and equity financed?

sales- 6mil
ROE- 12%
asset turnover- 3.2x
equity financed- 50%
No preferred stock outstanding. What is the net income?

Answer:

Use DuPont Decomposition of ROE and solve for NI:
ROE = Net Profit Margin (i.e. Net Income/Sales) * Asset Turnover * Equity Multiplier (i.e. A / E, also known as Financial Leverage)

(note that if you have 50% equity financing, then for every dollar of assets you have $0.50 in equity, so A/E = 1/.50 = 2)

0.12 = X/6mil * 3.2 * 2.0
0.12 = X/6m * 6.4
0.01875 = X/6m
X = 112,500<<<Net Income...