XYZ Corp.has a profit margin of 7 percent, a debt burden of .8, and has financed two-thirds of its assets through equity.What asset turnover ratio is necessary to achieve an ROE of 18 percent?

Question

Quizplus · Accepted Answer

To find the asset turnover ratio, rearrange the formula: asset turnover = ROE / (leverage ratio x profit margin x debt burden). Given ROE = 18%, leverage ratio = 1.5 (since two-thirds equity implies one-third debt, leverage ratio = 1/(1-2/3) = 1.5), profit margin = 7% (0.07), and debt burden = 0.8, the calculation is: asset turnover = 18 / (1.5 x 0.07 x 0.8) = 2.14.

XYZ CorpHas a Profit Margin of 7 Percent, a Debt Burden