Question

Jack Corp. has a profit margin of 10.70 percent, total asset turnover of 1.45, and ROE of 18.61 percent. What is the firm's debt-equity ratio?

Answer 1

0.20

Step-by-step explanation:

Given that,

Profit margin = 10.70 percent

Total asset turnover = 1.45

ROE = 18.61 percent

ROE = Profit margin × Total asset turnover × Equity multiplier

0.1861 = 0.1070 × 1.45 × Equity multiplier

0.1861 ÷ (0.1070 × 1.45) = Equity multiplier

0.1861 ÷ 0.15515 = Equity multiplier

1.20 = Equity multiplier

Equity multiplier = 1 + (debt ÷ equity)

1.20 - 1 = debt-equity ratio

0.20 = debt-equity ratio

Therefore, the firm's debt-equity ratio is 0.20.