consider a company with ROE of 14.5%, and a profit margin of 6.5%. if total asset...

consider a company with ROE of 14.5%, and a profit margin of 6.5%. if total asset turnover is 1.8, what is the firm's debt-equity ratio?

Expert Solution

Based on Du Pont Relation,

ROE = Profit margin * Asset turnover * Equity Multiplier

14.5% = 6.5% * 1.8 * Equity multiplier

Equity Multiplier = 14.5%/(6.5% * 1.8) = 1.239316

Assets/Equity = 1.239316

Assets = Debt + Equity

(Debt + Equity)/Equity = 1.239316

Debt/Equity + 1 = 1.239316

Debt/Equity = 0.2393 or 23.93%

jeff jeffy answered 2 years ago

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