Question

Suppose you bought a condo for $100,000 financing it with a $20,000 down payment of your own funds

and an $80,000 mortgage loan from a bank. (10 point)

Now assume that, instead of (a), you only put down $10,000 and borrowed $90,000 to buy the condo. Assuming that the market value of your house has risen to $120,000 and ignoring interest and other costs, calculate your rate of return on your asset (ROA) and your rate of return on equity (ROE).

Answer 1

Rate of return on Asset (ROA)

= Net income ÷ Total Assets

Rate of return on Equity (ROE)

= Net income ÷ shareholder's equity

Net income= 1,20,000- 1,00,000

= 20,000

Total Assets= 1,00,000

ROA= Net income ÷ Total Assets × 100 (for calculating in percentage).

= 20,000 ÷ 1,00,000 × 100

= 20%

Net income= 1,20,000-1,00,000= 20,000

Shareholder's equity= Total assets - total liabilities

= 1,00,000- 90,000= 10,000

ROE= Net income ÷ shareholder's equity × 100 (Calculating in percentage)

= 20,000 ÷ 10,000 × 100

= 200%