Jiminy Cricket Removal has a profit margin of 11 percent, total asset turnover of 1.05, and ROE of 14.41 percent.

Jiminy Cricket Removal has a profit margin of 11 percent, total asset turnover of 1.05, and ROE of 14.41 percent.

 

Required:

What is this firm’s debt-equity ratio? (Round your answer to 2 decimal places (e.g., 32.16).)

 

Debt-equity ratio

Explanation:

We can use the Du Pont identity and solve for the equity multiplier. With the equity multiplier we can find the debt-equity ratio. Doing so we find:

 

ROE = (Profit margin)(Total asset turnover)(Equity multiplier)

0.1441 = (0.11)(1.05)(Equity multiplier)

Equity multiplier = 1.25

 

Now, using the equation for the equity multiplier, we get:

 

Equity multiplier = 1 + Debt-equity ratio

1.25 = 1 + Debt-equity ratio

Debt-equity ratio = 0.25