Question

SME Company has a debt-equity ratio of .70. Return on assets is 7.8 percent, and total equity is $530,000. a. What is the equity multiplier? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the return on equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the net income? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Answer 1

Answer: (a)  1.70

(b) 13.26%

(c) $70,278.00  

Explanation:

Given that,

Debt-equity ratio = 0.70

Return on assets = 7.8%

Total equity = $530,000

Debt = 0.70 × Equity

        = 0.70 × $530,000

        = $371,000

Assets = Debt + Equity

           = $371,000 + $530,000

           = $901,000

(a) $Equity\ multiplier = \frac{Assets}{Equity}$

     $Equity\ multiplier = \frac{901,000}{530,000}$  

                                         = 1.70

(b)  Return on Assets =  Assets × Return on assets percent

                                   =$901,000 × 7.8%

                                   = $70,278.00  

   $Return\ on\ Equity = \frac{Return\ on\ Assets}{Equity}$  

   $Return\ on\ Equity = \frac{70,278.00}{530,000}$

                                         = 13.26%

(c)  Net income = Return on Assets

                         = $70,278.00