Question

A firm has a debt-to-total assets ratio of 60%, $300,000 in debt, and a net income of $50,000. Calculate the return on equity.

Answer 1

The return on equity for the firm is -294.12%.

Step-by-step explanation:

To calculate the return on equity, we need to first calculate the equity of the firm. The equity can be calculated by subtracting the total liabilities from the total assets:

• Assets = reserves (30) + bonds (50) + loans (50) = 130
• Liabilities = deposits (300)
• Equity = Assets - Liabilities = 130 - 300 = -170

Next, we can calculate the return on equity using the net income and equity:

• Return on Equity = Net Income / Equity
• Return on Equity = $50,000 / -170
• Return on Equity = -294.12%

Therefore, the return on equity for the firm is -294.12%.