Question

Kindle Fire Prevention Corp. has a profit margin of 6.2 percent, total asset turnover of 2.1, and ROE of 18.34 percent. What is this firm’s debt–equity ratio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Answer 1

Answer: Debt- Equity ratio is 0.41

Step-by-step explanation: Debt- Equity ratio is calculated by subtracting one from the equity multiplier.

To solve this problem the du pont analysis is used which is Return on equity = Profit margin * Total Asset turnover * equity multiplier

0.1834 = 0.062 × 2.10 * Equity multiplier (EM)

0.1834 = 0.1302

EM = 1.41

Therefore debt-equity ratio = EM - 1

= 1.41 - 1 = 0.41