Rainbow Company has a debt-equity ratio of 1.40. Return on assets is 7.65 percent, and total equity is $700,000. 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: With the information provided, we need to calculate the return on equity using an extended return on equity equation. We first need to find the equity multiplier which is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + 1.40 Equity multiplier = 2.40 Now we can calculate the return on equity as: ROE = (ROA)(Equity multiplier) ROE = .0765(2.40) ROE = .1836, or 18.36% The return on equity equation we used was an abbreviated version of the Du Pont identity. If we multiply the profit margin and total asset turnover ratios from the Du Pont identity, we get: (Net income / Sales)(Sales / Total assets) = Net income / Total assets = ROA With the return on equity, we can calculate the net income as: ROE = Net income / Total equity .1836 = Net income / $700,000 Net income = $128,520

Rainbow Company has a debt-equity ratio of 1.40. Return on assets is 7.65 percent, and total equity is $700,000.

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:

With the information provided, we need to calculate the return on equity using an extended return on equity equation. We first need to find the equity multiplier which is:

Equity multiplier	=	1 + Debt-equity ratio
Equity multiplier	=	1 + 1.40
Equity multiplier	=	2.40

Now we can calculate the return on equity as:

ROE	=	(ROA)(Equity multiplier)
ROE	=	.0765(2.40)
ROE	=	.1836, or 18.36%

The return on equity equation we used was an abbreviated version of the Du Pont identity. If we multiply the profit margin and total asset turnover ratios from the Du Pont identity, we get:

(Net income / Sales)(Sales / Total assets) = Net income / Total assets = ROA

With the return on equity, we can calculate the net income as:

ROE = Net income / Total equity

.1836 = Net income / $700,000

Net income = $128,520