Leverage ratios: Norton Company has a debt-to-equity ratio of 2.22, ROA of 12.49

Question

Leverage ratios: Norton Company has a debt-to-equity ratio of 2.22, ROA of 12.49 percent, and total equity of $1,983,546.The company’s equity multiplier is? its debt ratio is? and its ROE is ?

Explanation / Answer

Equity = $1,983,546 Debt/Equity = 2.22 => Debt = 2.22 * $1,983,546 = $4,403,472.12 Equity = Assets - Debt => Assets = Equity + Debt = $1,983,546 + $4,403,472.12 = $6,387,018.12 ROA = Net Income / Assets = 12.49% = 0.1249 Net Income = ROA * Assets = 0.1249 * $6,387,018.12 = $797,738.563 Equity multiplier = Assets/Equity = $6,387,018.12/$1,983,546 = 3.22 Debt Ratio = Debt/Assets = $4,403,472.12/ $6,387,018.12 = 0.69041386 ROE = Net Income / Equity = $797,738.563/$1,983,546 = 0.402178

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