Question

Equity Multiplier and Return on Equity?Quinn Company has a debt–equity ratio of .75. Return on assets is 8.6 percent, and total equity is $975,000. What is the equity multiplier? Return on equity? Net income?

Answer 1

debt–equity ratio = Debt / Equity

Hence Debt = 0.75 * $ 975,000

= $ 731,250

Total Assets = Debt+ Equity

= $ 731,250 + 975,000

= $ 1,706,250

Equity Multiplier = Total Assets / Total Equity

= $ 1,706,250 / $ 975,000

= 1.75

Hence the correct answer is 1.75

Now, Return on Assets = Net Income / Total Assets

Hence Net Income= 1706250 * 8.6%

= $ 146,737.50

Hence the correct answer is $ 146,737.50

Return on Equity = Net Income / Total Equity

= $ 146,737.50 / $ 975,000

= 15.05%

Hence the correct answer is 15.05%