Question

A retailer has a net profit of $1,000,000, total assets of $12,000,000, a 2.5 asset turnover ratio, and a net worth of $5,000,000. What is its financial leverage ratio?

1) .083 times
2) .500 times
3) 2.00 times
4) 2.40 times
5) 4.80 times

Answer 1

The financial leverage ratio for the retailer can be calculated by dividing the total assets of $12,000,000 by the net worth of $5,000,000, which results in a financial leverage ratio of 2.40 times. So the correct answer is option 4.

Step-by-step explanation:

The question asks us to calculate the financial leverage ratio of a retailer given certain financial information. The financial leverage ratio is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds. It can also be understood as the ratio of the company's total assets to its net worth (equity). To calculate the financial leverage ratio, we divide the total assets by the net worth.

In this case, the retailer has total assets of $12,000,000 and a net worth of $5,000,000. Using the formula:

Financial Leverage Ratio = Total Assets / Net Worth

We get:

Financial Leverage Ratio = $12,000,000 / $5,000,000

Financial Leverage Ratio = 2.40 times

Therefore, the correct answer is option 4) 2.40 times.