A corporation has a total asset turnover of 2 times, ROA of 12 percent and EM of 1.17. What is this firm's profit margin and debt ratio?
A)Profit margin: 2 percent; Debt ratio: 19.45 percent
B)Profit margin: 3 percent; Debt ratio: 31.81 percent
C)Profit margin: 4 percent; Debt ratio: 12.94 percent
D)Profit margin: 6 percent; Debt ratio: 14.53 percent

Question

Quizplus · Accepted Answer

The profit margin is calculated as ROA divided by total asset turnover, which is 12% / 2 = 6%. The equity multiplier (EM) is 1.17, which implies a debt ratio of 1 - (1/EM) = 1 - (1/1.17) = 14.53%.

A Corporation Has a Total Asset Turnover of 2 Times