Question

Shelton Company has a debt-equity ratio of 1.33. return of assets is 7.58 percent, and total equity is 665,000. what is the equity multiplier? what is the return on equity? what is the net income?

Answer 1

Data given:

1. Debt / equity = 1.33

2. Profit ( Net Income ) / Total Asset * 100 = 7.58

3. Total equity = 6,65,000

Solutions step wise

1. Debt / equity = 1.33 i.e Debt / 665000 = 1.33. Thus Debt = 665000*1.33 = $8,84,450

2. Debt + Equity = Asset, thus Asset= 884450 + 665000 = $15,49,450

3. Equity multiplier = Asset/ Equity, thus 1549450/ 665000 = 2.33

4. Net income / Asset*100 = 7.58 i.e Net income / 1549450 *100 = 7.58.Thus net income = $1,17,448

5. Return on equity = Net income/ Equity* 100 i.e 117448 / 665000 * 100 = 17.66%