Question

The ROE of Concrete Pumping Holdings, Inc. is equal to 10% and ROA is equal to...

The ROE of Concrete Pumping Holdings, Inc. is equal to 10% and ROA is equal to 8%. The firm finances only with short-term debt, long-term debt, and common equity, so assets equal total invested capital. What is the firm's total debt to total capital ratio.

Select one:

a. 75%

b. 80%

c. 20%

d. 25%

e. 40%

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Answer #1

Answer-

Given

Concrete Pumping Holdings, Inc

ROA = Net income / Assets = 8 %
ROE = Net income / Equity = 10 %

ROA / ROE = Equity / Assets = 8 % / 10 % [ Net income / Assets x Equity / Net income]

Assets = Total invested capital = 10
Equity = 8

Assets - Equity = Total debt = short-term debt + long-term debt

Equity / Assets = 8 /10
Equity / ( Equity +Total debt )= 8 /10 = 8 / ( 8 +2 )

Therefore debt value = 2

Total debt / Total capital ratio = 2 /10 = 20 %

Therefore the correct option is c. 20 %

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