Question

A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?

A. 26.27 percent
B. 29.23 percent
C. 18.48 percent
D. 10.95 percent
E. 13.50 percent

Answer 1

The return on equity (ROE) for the firm is calculated to be 29.23 percent by using the provided return on total assets and the debt-total asset ratio. The correct option is B.

Step-by-step explanation:

To calculate the return on equity (ROE), we need to use the given return on total assets (ROA) and the debt-total asset ratio. The formula for ROE is ROE = ROA / (1 - Debt Ratio). First, we calculate the equity ratio which is 1 - debt ratio, then we apply the ROE formula using the given values.

Debt ratio = 61% or 0.61
Equity ratio = 1 - 0.61 = 0.39
ROA = 11.4%

Now, apply these values to calculate the ROE:
ROE = 0.114 / 0.39 = 0.2923 or 29.23%%

Therefore, the return on equity (ROE) is 29.23 percent, which corresponds to option B.