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Zako51
Feb 23, 2010, 04:38 PM
I have been stuck on this problem for hours. I just can't figure out how to find the debt ratio. Any help would be greatly appreciated.

DuPont equation: The Rangoon Timber Company has the following relationships:

Sales / Total assets 1.50;
ROA 9.87%;
ROE 15.46%

Find Rangoon’s profit margin? 6.55% (I Found this one)

Find the debt ratio?

ArcSine
Feb 24, 2010, 06:05 AM
Let's let n, a, d, and e denote, respectively, Net income; Assets; Debt; and Equity.

Two of your given ratios lead to...

ROA = n/a = 0.0987 \rightarrow n = 0.0987a
ROE = n/e = 0.1546 \rightarrow n = 0.1546e

Since of course n = n, you have 0.0987a = 0.1546e.

Now remember that the fundamental accounting identity says that assets = debt + equity, so re-write that last equation as

0.0987(d + e) = 0.0987d + 0.0987e = 0.1546e

Deducting 0.0987e from both sides leaves you with

0.0987d = 0.0559e

To button it all up, divide both sides by 0.0987e to produce

d/e = 0.0559 / 0.0987

That left-hand side represents "debt / equity" ratio. If instead you wanted a "debt / assets" ratio ("debt ratio", per your question, could mean either), then follow a similar algebraic process to arrive at d / a.