If jPhone, Inc., has an equity multiplier of 1.41, total asset turnover of 1.70, and a profit margin of 8 percent.
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1. Let us assume that the company’s assets are $100.
2. The equity will be:
Total Assets / Total Stockholders’ Equity = 1.41
$100 / Total Stockholders’ Equity = 1.41
$100/ 1.41 = Total Stockholders’ Equity
$70.9 = Total Stockholders’ Equity
3. Turnover:
$100 * 1.70 = $170
4. Profit:
8% of $170 = $13.6
5. ROE (Return on Equity):
($13.6/$70.9) *100 = 19.18%
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Definition of ‘Equity Multiplier’
A measure of financial leverage. Calculated as:
Total Assets / Total Stockholders’ Equity
http://www.investopedia.com/terms/e/equitymultipli…
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Source(s): Management Accountancy
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