Question

You are thinking of investing in Nikki T's, Incorporated. You have only the following information on the firm at year-end: net income is 250,000, total debt is2.5 million, and debt ratio is 55 percent. What is Nikki T's return on equity (ROE) for next year?

Answer 1

Nikki T's return on equity (ROE) for next year is 25%.

Step-by-step explanation:

To calculate Nikki T's return on equity (ROE) for next year, we need to use the formula: ROE = Net Income ÷ Average Shareholders' Equity. Since we don't have the information for Nikki T's shareholders' equity, we can use the formula ROE = Net Income ÷ (Total Assets - Total Debt). Given that the net income is $250,000 and the total debt is $2.5 million, we can calculate the total assets by dividing the total debt by the debt ratio (55%): $2.5 million ÷ 0.55 = $4.5 million. Therefore, the return on equity (ROE) for Nikki T's next year is $250,000 ÷ ($4.5 million - $2.5 million) = 25%.