Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets...

Company had $25,000,000 in sales last year. The company's net income was $875,000. Its total assets equal $8,000,000. The company's ROE was 16%. The company is financed entirely with debt and common equity. What is the company's debt ratio?

A. 31.6%

B. 3.5%

C. 10.9%

D. 14.6%

E. 64.4%

Expert Solution

Answer: Option A

ROE = Net Income/Shareholders' Equity

16% = $875,000/Shareholders' Equity
Shareholders' Equity = $875,000/16% = $5,468,750

Total Assets = Total Debt + Total Shareholders' Equity = Total Capital

Total Debt = $8,000,000 - $5,468,750 = $2,531,250

Debt Ratio = Debt/Total Capital

Debt Ratio = $2,531,250/$8,000,000 = 31.6%

jeff jeffy answered 2 years ago

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