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8 January, 00:55

Firm A and Firm B have debt-total asset ratios of 65 percent and 45 percent, respectively, and returns on total assets of 5 percent and 9 percent, respectively. What is the return on equity for Firm A and Firm B?

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  1. 8 January, 01:02
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    Firm A = 14.29%

    Firm B = 16.36%

    Explanation:

    Firm A:

    Debt-total asset ratio = 65 percent

    = 0.65

    Therefore,

    Equity-total asset ratio = 1 - 0.65

    = 0.35

    Returns on total assets = (Net Income : Total assets) * 100

    = 5 percent

    = 0.05

    Return on Equity:

    = (Net Income : Equity) * 100

    = (0.05 : 0.35) * 100

    = 0.1429 * 100

    = 14.29%

    Firm B:

    Debt-total asset ratio = 45 percent

    = 0.45

    Therefore,

    Equity-total asset ratio = 1 - 0.45

    = 0.55

    Returns on total assets = (Net Income : Total assets) * 100

    = 9 percent

    = 0.09

    Return on Equity:

    = (Net Income : Equity) * 100

    = (0.09 : 0.55) * 100

    = 0.1636 * 100

    = 16.36%
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