Question

Chapter 3 12. Equity Multiplier and Return on Equity (L04) Bowsman Fried Chicken Company has a debt-equity ratio of 0.80. Return on assets is 7.9%, and total equity is $480,000. What is the equity multiplier? Net income? Return on equity?

Answer 1

Equity multiplier Equity multiplier = Total assets / Total Equity Debt equity ratio = 0.80 Debt/Equity = 0.80 Debt / 480000 = 0.80 Debt = 0.80 * 480000 S 384,000 We know the accounting equation Assets = Liabilities + Equity Assets = 384000 + 480000 S 864,000 Equity Multiplier = 864000/480000 1.8 times Net Income Return on assets = Net Income/Total assets 7.9 %= Net Income / 864000 Net Income = 864000*7.9% S 68,256 Return on equity Return on equity = Net Income / Total equity =68256/480000 14.22% Equity multiplier Net Income Return on equity 1.8 times S 68,256 14.22%