Shelton Company has a debt–equity ratio of .75. Return on assets is 6.9 percent, and total equity is $815,000. What is the equity multiplier? Return on equity? Net income?

The equity multiplier: 1.75

Return on equity: 12.075%

Net income: $98,411.25

Explanation:

The equity multiplier is calculated by using following formula:

The equity multiplier = Total asset/ Total equity

Shelton Company has a debt–equity ratio of .75 and total equity of $815,000:

Debt-to-equity ratio = Total debt (or liabilities)/Total equity

Total debt (or liabilities) = Debt-to-equity ratio x Total equity = 0.75 x $815,000 = $611,250

Basing on accounting equation:

Total asset = Total liabilities + Total equity = $611,250 + $815,000 = $1,426,250

The equity multiplier = $1,426,250/$815,000 = 1.75

The return on equity (ROE) is a profitability ratio that shows how much profit each dollar of equity generates. ROE is calculated by using following formula:

The return on equity (ROE) = Net income/Equity

Shelton Company has Return on assets (ROA) is 6.9 percent

ROA = Net Income/Total Assets

Net income = ROA x Total Assets = 6.9% x $1,426,250 = $98,411.25

The return on equity (ROE) = ($98,411.25/$815,000) x 100% = 12.075%

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