Question

SME Company has a debt-equity ratio of .70. Return on assets is 9.00 percent, and total equity is $525,000.

a.	What is the equity multiplier?

b.	What is the return on equity?

Answer 1

Equity = $525,000
Return on Assets (RoA) = 9%
Debt/Equity = 0.7

Debt/Equity = Total Debt / Total Equity
0.7 = Total Debt / 525,000
Total Debt = 0.7 * 525000
= $367,500

Total Liabilities = Total Debt + Total Equity
= 367500 + 525000
=  892,500

Total Assets = Total Liabilities

Equity Multiplier = Total Assets / Total Equity
= 892500 / 525000
Equity Multiplier = 1.7

Return on Assets = Net Income / Total Assets
0.09 = Net Income / 892500
Net Income = 892500 * 0.09
  Net Income = 80,325

Return on Equity = Net Income / Total Equity
= 80325 / 525000
Return on Equity = 0.153 or 15.3%