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

Profit margin can be calculated using the formula: Profit Margin = ROA / Total Asset Turnover. Substituting the given values, we get Profit Margin = 12% / 2 = 6%. The Equity Multiplier (EM) is given by 1 + Debt/Equity. Since EM is 1.17, we can solve for Debt/Equity = 0.17. The debt ratio, which is Debt / (Debt + Equity), can be calculated by rearranging the Debt/Equity ratio: Debt Ratio = Debt / (Debt + Equity) = 0.17 / (1 + 0.17) = 0.17 / 1.17 = 14.53%.

A Corporation Has a Total Asset Turnover of 2 Times