In addition to show your step-by-step calculations, you must explain in your own
ID: 2819483 • Letter: I
Question
In addition to show your step-by-step calculations, you must explain in your own words, in three lines, the process that you have used to solve this problem. There is no credit, if no explanation is given
Problem1(2 points) Adamo Company has sales of $315,000 and net income of $17,832, and its year-end- total assets is $210,000. The company's debt to asset ratio is 42.50%. What is company's profit margin? What is company's equity multiplier? What is company's total assets turnover? What is company's ROE?Explanation / Answer
debt to asset ratio=debt/total assets
Hence debt=($210,000*42.5%)=$89250
Total assets=debt+equity
Hence equity=(210,000-89250)=$120750
1.Profit margin=net income/sales
=(17832/315000)=5.66%(Approx).
2.Equity multiplier=Total assets/equity
=(210,000/120750)=1.74(Approx).
3.Total asset turnover=Sales/Total assets
=(315000/210,000)=1.50
4.ROE=net income/equity
=(17832/120750)=14.77%(Approx).
Debt to asset ratio can be used to compute total debt .After calculating total debt;total equity can be computed by deducting total assets with total debt.Profit margin is the net income generated from the sales revenue for the period while total asset turnover is the total sales divided by the total assets.Also return on equity can be calculated by dividing net income by equity(which has been computed using the debt to asset ratio) and the same equity computed can be used to compute equity multiplier.
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