Question

A firm has an ROA of 14%, a debt/equity ratio of 0.8, a tax rate of 35%, and the interest rate on the debt is 10%.The firm's ROE is _________.

A) 11.18%
B) 8.97%
C) 11.54%
D) 12.62%
E)none of the above

Answer 1

The firm's ROE can be calculated using the formula ROE = ROA * (1 - Debt/Equity). Given the provided values, the firm's ROE is 2.8%, which is not one of the given options.

Step-by-step explanation:

To calculate the firm's ROE (Return on Equity), we need to use the formula:

ROE = ROA * (1 - Debt/Equity)

Given that the ROA is 14% and the debt/equity ratio is 0.8, we can substitute the values into the formula:

ROE = 0.14 * (1 - 0.8) = 0.14 * 0.2 = 0.028 = 2.8%

Therefore, the firm's ROE is 2.8%, which is not one of the options given in the question. So, the correct answer is E) none of the above.