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

Step-by-step 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 = (Assets)/(Equity)`

`Equity\ multiplier = (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 = (Return\ on\ Assets)/(Equity)`

`Return\ on\ Equity = (70,278.00)/(530,000)`

= 13.26%

(c) Net income = Return on Assets

= $70,278.00