Question

Gates Appliances has a return-on-assets (investment) ratio of 21 percent.
  
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity? (Input your answer as a percent rounded to 2 decimal places.)
  

   

b. If the firm had no debt, what would the return-on-equity ratio be? (Input your answer as a percent rounded to 2 decimal places.)
  

   

Answer 1

Answer a.

Return on Assets = 21%
Debt-to-total-assets Ratio = 40%

Equity-to-total-assets Ratio = 100% - Debt-to-total-assets Ratio
Equity-to-total-assets Ratio = 100% - 40%
Equity-to-total-assets Ratio = 60%

Return on Equity = Return-on-assets ratio / Equity-to-total-assets Ratio
Return on Equity = 21% / 60%
Return on Equity = 35%

So, return-on-equity ratio is 35.00%

Answer b.

If company has no debt:

Return-on-equity ratio = return-on-assets Ratio
Return-on-equity ratio = 21%

So, return-on-equity ratio is 21.00%