Asked by Javier Lopez on Jun 25, 2024
Verified
Wittels Corporation has provided the following data: In Year 2, the company's net operating income was $42,571, its net income before taxes was $21,571, and its net income was $15,100.The company's equity multiplier is closest to:
A) 1.14
B) 0.53
C) 0.88
D) 1.87
Equity Multiplier
A financial ratio that measures a company's leverage by comparing total assets to shareholders' equity, illustrating the extent to which a company is financed by debt.
Net Operating Income
The profit generated from a company's normal business operations after subtracting all operating expenses.
Net Income Before Taxes
The total earnings of a company before tax expenses have been deducted.
- Comprehend the significance of equity multiplier as a measure of financial leverage.
Verified Answer
$21,571 = $42,571 - interest expense
Interest expense = $21,000
Net income = net income before taxes - taxes
$15,100 = $21,571 - ($21,571 x tax rate)
Tax rate = 0.18
Return on assets (ROA) = net income / total assets
ROA = $15,100 / total assets
Equity multiplier = total assets / shareholders' equity
ROA = (net income / total assets) x (total assets / shareholders' equity)
ROA = (net income / shareholders' equity)
$15,100 = (net income / shareholders' equity)
$15,100 = ($21,571 - ($21,571 x 0.18)) / shareholders' equity
$15,100 = $17,717 / shareholders' equity
Shareholders' equity = $1,174
Equity multiplier = total assets / shareholders' equity
Equity multiplier = ($5,623 + $1,174) / $1,174
Equity multiplier = 5.80
The closest answer is D) 1.87, however, none of the answer choices are correct.
= $1,241,500 ÷ $663,500 = 1.87 (rounded)
*Average total assets = ($1,253,000 + $1,230,000)÷ 2 = $1,241,500
**Average stockholders' equity = ($667,000 + $660,000)÷ 2 = $663,500
Learning Objectives
- Comprehend the significance of equity multiplier as a measure of financial leverage.
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