Question

If a firm has a Return on Assets of 12% and a debt to total asset...

If a firm has a Return on Assets of 12% and a debt to total asset ratio of 0.6, what is its Return on Equity?

  • A. 30.00%

  • B. 16.80%

  • C. 20.00%

  • D. 19.20%

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Answer #1

Answer-

Given

Return on Assets (ROA) = 12 %

ROA = Net income / Assets = 12 / 100

Debt / Assets = 0.6

Debt / Assets = 0.6 / 1

Assets = Debt + Equity [ Debt = Liabilities ]

Debt / ( Debt + Equity ) = 0.6 / 1 = 0.6 / (0.6 + 0.4)

Equity = 0.4

ROA = Net income / ( Debt + Equity )

ROA = 12 / ( 60 + 40 ) [ Debt + Equity = 0.6 + 0.4 = 60 + 40 , From above equation )

ROE = Net income / Equity

ROE = 12 / 40

ROE = 0.30 = 30 %

Therefore ROE = 30 %

Hence Correct Option is A. 30 %

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