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15. SME Company has a debt-equity ratio of .60. Return on assets is 7.7 percent, and...

15. SME Company has a debt-equity ratio of .60. Return on assets is 7.7 percent, and total equity is $520,000.

a. What is the equity multiplier?

b. What is the return on equity?

c. What is the net income?

Solutions

Expert Solution

Debt-equity ratio = Total debt / Total equity

0.60 = Total debt / $520,000

Total debt = 0.60 × 520,000

                  = $312,000

Total assets = Total debt + Total equity

                    = 312,000 + 520,000

                    = $832,000

a.

Equity multiplier = Total assets / Total equity

                             = 832,000 / 520,000

                             = 1.6 (Answer)

c.

Return on assets = Net income / Average total assets

7.7% = Net income / 520,000

Net income = 520,000 × 0.077

                    = $40,040 (Answer)

b.

Return on equity = (Net income / Total equity) × 100

                            = (40,040 / 832,000) × 100

                            = 4.8125% (Answer)

jeff jeffy answered 1 year ago
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