Question

Johnson’s Catering has total assets of $105,000,000 an equity multiplier of 2.0, and net income of $4,800,000. What is the return on equity?

Answer 1

The formula for return on equity (ROE) is:

ROE = Net Income / Shareholders' Equity

To find shareholders' equity, we need to use the equity multiplier formula:

Equity Multiplier = Total Assets / Shareholders' Equity

We are given that the equity multiplier is 2.0, so we can solve for shareholders' equity:

Shareholders' Equity = Total Assets / Equity Multiplier

Shareholders' Equity = $105,000,000 / 2.0 = $52,500,000

Now we can plug in the values to calculate ROE:

ROE = $4,800,000 / $52,500,000 = 0.0914 or 9.14%

Therefore, the return on equity for Johnson's Catering is 9.14%.