Question

A firm has an ROE of 5%, a debt-to-equity ratio of 0.8, and a tax rate of 35% and pays an interest rate of 8% on its debt. What is its operating ROA? ROE= [1 - tax rate] (ROA + ROA - Interest Rate) Debt/ Equit]

Answer 1

ROA= 8,2%

Step-by-step explanation:

ROE= [1 - tax rate] (ROA + ROA - Interest Rate) Debt/ Equity]

5%=[1-35%](ROA+ROA-8%)0.8]

0.05 = [ 1 - 0.35 ] ( 2ROA - 0.08) 0.8]

0.05 = [0.75](2ROA-0.08)0.8]

`(0.05)/(0.8)`=[0.75](2ROA-0.08)

0.0625 = [0.75](ROA-0.08)

`(0.0625)/(0.75)` = 2ROA - 0.08

0.08333...=2ROA - 0.08

0.08333...+0.08 = 2ROA

0.16333... = 2ROA

∴ ROA = 0.082 (rounded off)