Question

Jack Corp. has a profit margin of 6.4 percent, total asset turnover of 1.77, and ROE of 15.84 percent. What is this firm’s debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Answer:

40%

Explanation:

Given that,

Profit margin = 6.4 percent

Total asset turnover = 1.77

ROE = 15.84 percent

ROE = Profit margin × Total asset turnover × Leverage ratio

0.1584 = 0.064 × 1.77 × Leverage ratio

Leverage ratio, EM = 0.1584 ÷ (0.064 × 1.77)

                                 = 1.398 or 1.40

Therefore,

firm’s debt-equity ratio = EM - 1

                                      = 1.40 - 1

                                      = 0.4 or 40%