Question

Jack Corp. has a profit margin of 5.5 percent, total asset turnover of 1.9, and ROE of 20.04 percent. What is this firm’s debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

ROE=Profit margin*Total asset turnover*Equity multiplier

20.04=(5.5*1.9*Equity multiplier)

Equity multiplier=20.04/(5.5*1.9)

=1.91770335

Equity multiplier=Total assets/equity

Total assets=1.91770335*Equity

Total assets=Total liabilities+Total equity

Hence debt=1.91770335*Equity-Equity

=0.91770335*Equity

Hence debt-equity ratio=debt/equity

=0.92(Approx).