Question

A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?

a. 26.27 percent
b. 29.23 percent
c. 18.48 percent
d. 10.95 percent
e. 13.50 percent

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that,

Debt-total asset ratio = 61 percent

Return on total assets = 11.4 percent

ROE = Net profit margin × Assets turnover × Equity multiplier

       ⇒ Net profit margin × Assets turnover = 11.4%

Debt total assets ratio = 61%

Since debt total asset ratio is 61% that reflects the debt is 61 and the total asset is 100% so the equity is

= 100% - 61%

= 39%

Therefore, Equity total assets ratio = 39%

Equity multiplier = Total assets ÷ Equity

                           = 100 ÷ 39

                           

Hence,

ROE = ROA × Equity multiplier

       = 11.4% × (100 ÷ 39)

       = 29.23%