Question

Braam Fire Prevention Corp. has a profit margin of 9.70 percent, total asset turnover of 1.41, and ROE of 18.75 percent. What is its firm's debt-equity ratio?

Answer 1

The question is solved on the basis of DuPont Identity as all necessary details are provided except the equity multiplier and hence DuPont Identity has been used.

Profit margin =9.70%

Total asset turnover=1.41

Return on equity=18.75%

Return on equity = (Profit margin)(Total asset turnover)(Equity multiplier)

Return on equity = 0.1875 = (0.097)(1.41)(Equity multiplier)

Equity multiplier = 0.1875 / (0.097)(1.41) = 1.37   0.13677

Debt equity ratio = Equity multiplier – 1 = 1.37 – 1 = 0.37