Lancaster Toys has a profit margin of 5.1 percent, a total asset turnover of 1.84, and a return on equity of 16.2 percent. What is the debt-equity ratio?
A) 0.73
B) 0.42
C) 0.81
D) 0.64
E) 0.83

Question

Quizplus · Accepted Answer

The return on equity (ROE) is calculated as Profit Margin * Total Asset Turnover * Equity Multiplier. Given ROE = 16.2%, Profit Margin = 5.1%, and Total Asset Turnover = 1.84, we can solve for the Equity Multiplier. The Equity Multiplier is 16.2 / (5.1 * 1.84) = 1.73. The Equity Multiplier is also equal to (1 + Debt-Equity Ratio), so the Debt-Equity Ratio is 0.73.

Lancaster Toys Has a Profit Margin of 5