Rainbow Company has a debt-equity ratio of 1.36. Return on assets is 7.61 percen
ID: 2755485 • Letter: R
Question
Rainbow Company has a debt-equity ratio of 1.36. Return on assets is 7.61 percent, and total equity is $680,000. Requirement 1: What is the equity multiplier? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Equity multiplier times Requirement 2: What is the return on equity? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Return on equity % Requirement 3: What is the net income? (Do not round intermediate calculations. Round your answer to the nearest whole dollar amount (e.g., 32).) Net income $
Explanation / Answer
We have:
D/E ratio = 1.36
ROA = 7.61%
Total Equity = 680,000
1)
Equity multiplier = (1+D/E ratio)
=1+1.36
= 2.36 times
2)
Return on Equity ROE = ROA x Equity multiplier
= 7.61% x 2.36
= 17.96%
3)
Net Income = ROE x total equity
=17.96% x 680,000
= 122,128
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