Question

Firm A has ROA of 15%. If its sales are $4 million, total liabilities are $2 million and debt ratio is 0.5 What is A’s ROE?
Group of answer choices

20%

18%

Not enough information to derive ROE

30%

Answer 1

ROE is computed as shown below:

= Net income / Equity

Total asset is computed as follows:

= Total Liabilities / Debt ratio

= $ 2 million / 0.50

= $ 4 million

So, net income will be as follows:

= $ 4 million x ROA

= $ 4 million x 15%

= $ 0.60 million

Equity is computed as follows:

= Total Assets - Total Liabilities

= $ 4 million - $ 2 million

= $ 2 million

So, ROE will be as follows:

= $ 0.60 million / $ 2 million

= 30%

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