Question

Zombie corp. has a profit margin of 5.8 percent, total asset turnover of 1.7, and roe of 20.34 percent. what is this firm's debt-equity ratio?

Answer 1

We use the Du-Pont equation here

As per Du-pont equation

ROE = profit margin * total asset turnover * Equity multiplier

Given, ROE = 20.34% = 0.2034

Profit margin = 5.8% = 0.058

Total asset turnover = 1.7

0.2034 = 0.058*1.7*Equity Multiplier

Equity Multiplier = 0.2034/(0.058*1.7) = 2.06288

Equity Multiplier = 1 + debt-equity ratio

2.06288 = 1+ debt equity ratio

debt-equity ratio = 2.06288 -1 = 1.06288

debt-equity ratio = 1.06 (Rounded to 2 decimals)