Question

1. Modernative Comp. has a debt–equity ratio of 0.65, its return on assets is 8.2 percent, and total equity is $515,000. What is Modernative’s equity multiplier? Return on equity? Net income?

Answer 1

Step-by-step explanation:

Equity multiplier is one of the financial leverage ratios, which measures the amount of a company's asset that are financed by the shareholder by comparing total assets with total shareholder's equity

`\text {Equity multiplier}=\frac{\text {Total Assets}}{\text {Total Equity}}`

`\text {Return on owner's equity}=\frac{\text {Net income}}{\text {Total equity}}`

Determine the amount of equity multiplier

Equity multiplier = 1 + Debt to equity ratio

= 1 + 0.65

= 1.65

Hence, the amount of equity multiplier is 1.65

Determine the amount of return on equity

Return on equity = Return on assets * Equity multiplier

= 0.082 * 1.65

= 13.53%

Hence, the Return on equity is 13.53%

Determine the amount of Net income

Net income = Return on equity * Total equity

= 13.53% * $515,000

= $69,679.50

Hence, the amount of net income is $69,679.50