Kansas Office Supply had $24,000,000 in sales last year. The company's net income was $400,000. Its total assets turnover was 6.0. The company's ROE was 15 percent. The company is financed entirely with debt and common equity. What is the company's debt ratio?

Question

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The debt ratio is calculated as follows:Debt ratio = Total debt / Total assetsWe know that the company's ROE is 15 percent and its total assets turnover is 6.0. This means that the company's net income is 15 percent of its total assets, or $3,600,000 (0.15 x $24,000,000). We also know that the company's net income is $400,000. This means that the company's total assets are $9,000,000 ($400,000 / 0.15).Since the company is financed entirely with debt and common equity, the debt ratio is equal to the total debt divided by the total assets. We know that the company's total assets are $9,000,000. We also know that the company's net income is $400,000 and its ROE is 15 percent. This means that the company's total equity is $2,666,666.67 ($400,000 / 0.15).Therefore, the company's debt ratio is ($9,000,000 - $2,666,666.67) / $9,000,000 = 0.33.

Kansas Office Supply Had $24,000,000 in Sales Last Year