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9 October, 16:18

Zombie corp. has a profit margin of 5.8 percent, total asset turnover of 1.7, and roe of 20.34 percent. what is this firm's debt-equity ratio?

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  1. 9 October, 17:41
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    We use the Du-Pont equation here

    As per Du-pont equation

    ROE = profit margin * total asset turnover * Equity multiplier

    Given, ROE = 20.34% = 0.2034

    Profit margin = 5.8% = 0.058

    Total asset turnover = 1.7

    0.2034 = 0.058*1.7*Equity Multiplier

    Equity Multiplier = 0.2034 / (0.058*1.7) = 2.06288

    Equity Multiplier = 1 + debt-equity ratio

    2.06288 = 1 + debt equity ratio

    debt-equity ratio = 2.06288 - 1 = 1.06288

    debt-equity ratio = 1.06 (Rounded to 2 decimals)
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