Question

Synovec Company has a debt-equity ratio of .85. Return on assets is 7.3 percent, and total equity is $910,000. 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 2 decimal places, e.g., 32.16.) a. 1.85 Equity multiplier Return on equity b. : % C. Net income

Answer 1

Equity Multiplier = D/E Ratio + 1 = 0.85+1 = 1.85

Debt to Equity = D/E = 0.85

D+E = 0.85 + 1 = 1.85

Debt weight = D/(D+E) = 0.85/1.85 = 46%

Equity weight = E/(D+E) = 1/1.85 = 54%. Total equity is given as 910000.

Let x be total assets. 54% of x = 910000. So x = (910000 *100)/54 = 1685185.19

Debt = 1685185.19 - 910000 = 775185.19

Net Income = Total Assets * 7.3% = 1685185.19 * 7.3% = $ 123018.519 or $123018.52

Return on equity = Net Income/Equity = 123018.52/910000 = 13.518 or 13.52%