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1 April, 10:35

A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?

a. 26.27 percent

b. 29.23 percent

c. 18.48 percent

d. 10.95 percent

e. 13.50 percent

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Answers (1)
  1. 1 April, 11:29
    0
    Option (b) is correct.

    Explanation:

    Given that,

    Debt-total asset ratio = 61 percent

    Return on total assets = 11.4 percent

    ROE = Net profit margin * Assets turnover * Equity multiplier

    ⇒ Net profit margin * Assets turnover = 11.4%

    Debt total assets ratio = 61%

    Since debt total asset ratio is 61% that reflects the debt is 61 and the total asset is 100% so the equity is

    = 100% - 61%

    = 39%

    Therefore, Equity total assets ratio = 39%

    Equity multiplier = Total assets : Equity

    = 100 : 39

    Hence,

    ROE = ROA * Equity multiplier

    = 11.4% * (100 : 39)

    = 29.23%
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