Question

Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.77, and ROE of 15.84 percent. What is this firm’s debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

40%

Explanation:

Given that,

Profit margin = 6.4 percent

Total asset turnover = 1.77

ROE = 15.84 percent

ROE = Profit margin × Total asset turnover × Leverage ratio

0.1584 = 0.064 × 1.77 × Leverage ratio

Leverage ratio, EM = 0.1584 ÷ (0.064 × 1.77)

                                 = 1.398 or 1.40

Therefore,

firm’s debt-equity ratio = EM - 1

                                      = 1.40 - 1

                                      = 0.4 or 40%

Answer 2

The firm's debt to equity ratio is 0.40

Return on equity (ROE) = net income / average total equity

Using the Dupont formula, ROE can be determined using:

ROE = Net profit margin x asset turnover x financial leverage

ROE = (Net income / Sales) x (Sales/Total Assets) x (total asset / common equity)

15.84 = 6.4 X 1.77 x financial leverage

financial leverage = 15.84 / (6.4 X 1.77) =

15.84 / 11.328 = 1.40

Debt to equity ratio = financial leverage - 1

1.40 - 1 = 0.40

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