Y3K, Inc., has sales of $6,339, total assets of $2,955, and a debt–equity ratio of 1.50

Y3K, Inc., has sales of $6,339, total assets of $2,955, and a debt–equity ratio of 1.50. If its return on equity is 12 percent, what is its net income?

This is a multistep problem involving several ratios. The ratios given are all part of the DuPont Identity. The only DuPont Identity ratio not given is the profit margin. If we know the profit margin, we can find the net income since sales are given. So, we begin with the DuPont Identity:

ROE = 0.12 = (PM)(TAT)(EM) = (PM)(S / TA)(1 + D/E)

Solving the DuPont Identity for profit margin, we get:

PM = [(ROE)(TA)] / [(1 + D/E)(S)]
PM = [(0.12)($2,955)] / [(1 + 1.50)( $6,339)] = 0.0224

Now that we have the profit margin, we can use this number and the given sales figure to solve for net income:

PM = 0.0224 = NI / S
NI = 0.0224($6,339) = $141.84