A company earns 20% ROE on a margin of 8% and an asset efficiency of 1.25. What is the company's ratio of debt to assets?

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Quizplus · Accepted Answer

The company's ROE (Return on Equity) is calculated as the product of its profit margin, asset efficiency, and financial leverage (equity multiplier). Given ROE = 20%, margin = 8%, and asset efficiency = 1.25, we can find the equity multiplier: 20% = 8% * 1.25 * Equity Multiplier, which gives an equity multiplier of 2. The equity multiplier is the inverse of the equity ratio (Equity/Assets), so if the equity multiplier is 2, the equity ratio is 0.5, meaning the debt to assets ratio is also 0.5.

A Company Earns 20% ROE on a Margin of 8