Question

If Drummond Co., Inc. has an ROE = 21.5%, profit margin = 3.0%, and a total asset turnover ratio = 3.0? What is Drummond's equity multiplier (EM)? ENTER YOUR ANSWER TO TWO DECIMAL PLACES (e.g., 3.65).

Answer 1

Equity multiplier	Total assets/Total equity
ROE (Return on equity)	Net income/Total equity	0.215
Profit margin	Net income/Sales	0.03
Total asset turnover ratio	Sales/Total Assets	3
Profit margin/ROE	Total equity/Sales	0.139535
Total asset turnover ratio* ((Profit margin/ROE))	Total equity/ Total assets	0.418605
Equity multiplier	1/(Total asset turnover ratio* ((Profit margin/ROE)))	2.388889
Drummond's equity multiplier (EM) is equal to 2.39.