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Duncan Boutique’s total assets are $440,000, its return on assets (ROA) is 8%, and its debt...

Duncan Boutique’s total assets are $440,000, its return on assets (ROA) is 8%, and its debt ratio is 20%. What are Duncan’s (a) net income and (b) return on equity (ROE)?

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Answer #1
a) ROA = Net income/Total assets
Substituting available figures, we have
0.08 = NI/440,000
Therefore, net income = 440000*0.08 = 35200
b) ROE = ROA*Equity multiplier
Equity multiplier = Total assets/Equity
or 100%/(100%-Debt ratio) = 100%/(100%-20%) = 1.25
Therefore, ROE = 0.08*1.25 = 10.00%
Note:
Debt ratio is taken as Debt/Total assets and not
as debt/equity ratio.
If the given figure is debt/equity ratio the equity
multiplier will be 1.2/1 = 1.2 and ROE will be
0.08*1.2 = 9.6%
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