Final answer:
To calculate ROA, we first determined total assets from the total debt ratio and total debt. Then we used ROE to find net income, and finally, we divided net income by total assets to find the ROA, which is approximately 8%.
Step-by-step explanation:
You are asking how to calculate the Return on Assets (ROA) given certain financial information about Strongwell Co. To find the ROA, we need to know the net income and total assets, but we can find our way to the answer with what we have.
The total debt ratio helps us figure out the proportion of assets financed by debt. With a total debt ratio of 0.42, we know that 42% of the company's assets are financed by debt. Therefore, equity is financing the remaining 58% (since the total of debt and equity financing is always 100%).
Knowing that total debt is $548,000, we can calculate the total assets by dividing total debt by the total debt ratio: $548,000 / 0.42 = $1,304,762. Approximating for ease, the company's assets would be around $1.3 million.
Next, we use the Return on Equity (ROE), which is net income divided by shareholders' equity, to find net income. A 13.8% ROE means that for every dollar of equity, the company is earning $0.138 in net income. Since equity is the difference between total assets and total debt, we get equity = $1,304,762 - $548,000, about $756,762. So, net income is about 13.8% of $756,762, roughly $104,433.
Finally, to calculate ROA, which is net income divided by total assets: $104,433 / $1,304,762, which gives us around 8% for the ROA.