Question

Acme Dynamite is maintaining a solid debt ratio of .37 with total assets of $1,250 million. If its D/E ratio is .65 and it has NOI of $150 million, what is its return on equity?

a. 27.6%
b. 21.1%
c 19.75%

Answer 1

To find the return on equity (ROE), we need to calculate the equity ratio first. Next, we can calculate the equity using the formula: Equity = Total Assets - Total Liabilities. Finally, we can calculate the ROE using the formula: ROE = NOI / Equity.

Step-by-step explanation:

To find the return on equity (ROE), we need to calculate the equity ratio first. The equity ratio is equal to 1 minus the debt ratio, so it would be 1 - 0.37 = 0.63. Next, we can calculate the equity using the formula: Equity = Total Assets - Total Liabilities. Since we have the total assets as $1,250 million, and the debt ratio is 0.37, the total liabilities can be calculated as 0.37 * $1,250 million = $462.5 million. Therefore, the equity is $1,250 million - $462.5 million = $787.5 million.

Finally, we can calculate the ROE using the formula: ROE = Net Operating Income (NOI) / Equity. Plugging in the values, we get ROE = $150 million / $787.5 million = 0.19 or 19%. Therefore, the return on equity for Acme Dynamite is 19%. The correct option is c. 19.75%.