Question

ASAP PLEASE

Return on assets is 5%. Return on equity is 25%. Is that possible?

	A.	Yes. If total equity relative to total assets is large enough.
	B.	No. Return on assets is too low.
	C.	No. Return on equity cannot be larger than return on assets.
	D.	Yes. If debt relative to equity is large enough.

Answer 1

Assets = Debt + equity

Return on assets is calculated as follows

Return on equity is calculated as follows

Now if Equity is small that means debt is relatively large. It implies that the assets will be very high but mostly finance by debt

Smaller equity implies that the denominator in the ROE formula will be very small and therefore the ROE will be very high. However, the ROA will have a large denominator so it will be very small.

So the given situation is possible. This implies that option B and C are incorrect

Out of options A and D option D is correct while option A states completely the opposite and therefore incorrect.