Marshall Networks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio.
A) 30%
B) 40%
C) 50%
D) 60%

Question

Quizplus · Accepted Answer

We can use the DuPont Model to calculate the debt ratio:

ROE = Total Asset Turnover x Net Profit Margin x Equity Multiplier

17.5% = 2.5 x 3.5% x Equity Multiplier

Equity Multiplier = ROE / (Total Asset Turnover x Net Profit Margin)

Equity Multiplier = 17.5% / (2.5 x 3.5%) = 2

Debt Ratio = 1 - (1 / Equity Multiplier) = 1 - (1 / 2) = 0.5 = 50%

Therefore, the best choice is C, 50%.