Question

Norton Company has a debt-to-equity ratio of 2.20, ROA of 12.50 percent, and total equity of $1,689,000. What are the company’s equity multiplier, debt ratio, and ROE? (Round answers to 2 decimal places, e.g. 12.55 or 12.55%.)

The company’s equity multiplier is , its debt ratio is , and its ROE is %.

Answer 1

Required 1:

Equity multiplier = 1 + debt-to-equity ratio

= 1 + 2.20

= 3.20

Required 2:

Debt ratio = debt-to-equity ratio / Equity multiplier

= 2.20 / 3.20

= 0.6875

Required 3:

ROA = Net income / Total assets = 12.5%

12.5% = Net income / (3.20 * Equity)

12.5% = Net income / (3.20 * $1,689,000)

12.5% = Net income / $5,404,800

Net income = $6,75,600.

ROE = (Net income / Equity) * 100

= ($675,600 / $1,689,000) * 100

= 40%