Jensen's Shipping has total assets of $694,800 at year's end. The beginning owners' equity was $362,400. During the year, the company had sales of $711,000, a profit margin of 5.2 percent, a tax rate of 21 percent, and paid $12,500 in dividends. What is the equity multiplier at year-end?
A) 1.67
B) 1.72
C) 1.93
D) 1.80
E) 1.86

Question

Quizplus · Accepted Answer

The equity multiplier is a financial ratio that measures the degree of leverage used by a company. It can be calculated as total assets divided by total equity.

Equity Multiplier = Total Assets / Total Equity

Total Equity = Beginning Owners’ Equity + Net Income – Dividends

First, we need to calculate the net income:

Profit Margin = Net Income / Sales

Net Income = Profit Margin × Sales

Net Income = 0.052 × $711,000 = $36,972

Next, we need to calculate the total equity:

Total Equity = $362,400 + $36,972 - $12,500

Total Equity = $386,872

Finally, we can calculate the equity multiplier:

Equity Multiplier = $694,800 / $386,872

Equity Multiplier = 1.80

Therefore, the correct answer is D) 1.80.

Jensen's Shipping Has Total Assets of $694,800 at Year's End