Question

Firm A and Firm B have debt-total asset ratios of 39 percent and 29 percent and returns on total assets of 10 percent and 15 percent, respectively.

  

What is the return on equity for Firm A and Firm B? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Answer 1

A:

Debt-total assets ratio=debt/total assets

Hence debt=0.39*total assets

Total assets=Total liabilities+Total equity

Total equity=total assets-0.39*total assets

=0.61*total assets

ROA=Net income/total assets

Net income=0.1*total assets

ROE=net income/equity

=(0.1*total assets)/(0.61*total assets)

=16.39%(Approx)

B:

Debt-total assets ratio=debt/total assets

Hence debt=0.29*total assets

Total assets=Total liabilities+Total equity

Total equity=total assets-0.29*total assets

=0.71*total assets

ROA=Net income/total assets

Net income=0.15*total assets

ROE=net income/equity

=(0.15*total assets)/(0.71*total assets)

=21.13%(Approx)