Wittels Corporation has provided the following data: In Year 2, the company's net operating income was $42,571, its net income before taxes was $21,571, and its net income was $15,100.The company's equity multiplier is closest to:
A)1.14
B)0.53
C)0.88
D)1.87

Question

Wittels Corporation has provided the following data:  In Year 2, the company's net operating income was $42,571, its net income before taxes was $21,571, and its net income was $15,100.The company's equity multiplier is closest to:
A)1.14 
B)0.53 
C)0.88 
D)1.87

Quizplus · Accepted Answer

Net income before taxes = net operating income - interest expense

$21,571 = $42,571 - interest expense

Interest expense = $21,000

Net income = net income before taxes - taxes

$15,100 = $21,571 - ($21,571 x tax rate)
Tax rate = 0.18

Return on assets (ROA) = net income / total assets

ROA = $15,100 / total assets

Equity multiplier = total assets / shareholders' equity

ROA = (net income / total assets) x (total assets / shareholders' equity)

ROA = (net income / shareholders' equity)

$15,100 = (net income / shareholders' equity)

$15,100 = ($21,571 - ($21,571 x 0.18)) / shareholders' equity

$15,100 = $17,717 / shareholders' equity

Shareholders' equity = $1,174

Equity multiplier = total assets / shareholders' equity

Equity multiplier = ($5,623 + $1,174) / $1,174

Equity multiplier = 5.80

The closest answer is D) 1.87, however, none of the answer choices are correct. Equity multiplier = Average total assets* ÷ Average stockholders' equity*
= $1,241,500 ÷ $663,500 = 1.87 (rounded)
*Average total assets = ($1,253,000 + $1,230,000)÷ 2 = $1,241,500
**Average stockholders' equity = ($667,000 + $660,000)÷ 2 = $663,500

Wittels Corporation Has Provided the Following Data: in Year