Question

Refer to the information below to answer questions relating to "Essay" Problem #2:

Assume Meyer Corporation is 75 percent debt and 25 percent equity financed and has:

(1) Earnings before taxes = $1,500

(2) Sales = $5,000

(3) Dividend payout ratio = 60%

(4) Sales/Total Assets = 2.0

(5) Applicable tax rate = 30%

Calculate the company’s debt-equity ratio, company's equity multiplier, total debt ratio, profit margin, Return on assets (ROA), return on equity (ROE)

Answer 1

Debt-equity ratio = Debt/Equity

Company's equity multiplier =Assets/ Equity

Total debt ratio = Debt/ Assets

Profit margin = Net Profit/ Sales

Return on assets (ROA) = Net Profit/ Assets

Return on equity (ROE) = Net Profit/ Equity

Sales/Assets = 2.0

$5,000/ Assets = 2.0

$2,500 = Assets

Debt = 0.75*$2,500 = $1875

Equity = 0.25*$2,500 = $625

Net Profit = Earnings before taxes*(1 - Tax rate) = $1,500*(1-0.3) = $1050

Debt-equity ratio = $1875/$625 = 3

Company's equity multiplier = $2500/$625 = 4

Total debt ratio = $1875/ $2500 = 0.75

Profit margin = $1050/ $5,000 = 0.21

Return on assets (ROA) = $1050/ $2500 = 0.42

Return on equity (ROE) = $1050/ $625 = 1.68