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21 October, 21:53

SME Company has a debt-equity ratio of. 57. Return on assets is 7.9 percent, and total equity is $620,000. a. What is the equity multiplier. b. What is the return on equity? c. What is the net income?

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  1. 21 October, 22:01
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    (a) 1.57

    (b) 12.40%

    (c) $76,898.60

    Explanation:

    Debt-equity ratio = Debt : equity

    Hence,

    Debt = 0.57 equity

    = 0.57 * $620,000

    = $353,400

    Total assets = Debt + Equity

    = 353,400 + 620,000

    = $973,400

    (a) Equity multiplier:

    =Total assets : Equity

    = $973,400 : 620,000

    = 1.57

    (c) Return on assets = Net income : Total assets

    Net income = ($973,400 * 0.079)

    = $76,898.60

    (b) Return On Equity:

    = Net income : Total equity

    = $76,898.60 : 620,000

    = 12.40% (Approx).
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