Question

You are thinking of investing in Wave Runnerz, Inc. You have only the following information on the firm at year-end 2013: net income = $10 million, total debt = $65 million, and debt ratio = 35 percent. What is Wave Runnerz's ROE for 2018?

Answer 1

8.28%

Step-by-step explanation:

Given that,

Net income = $10 million

Total debt = $65 million

Debt ratio = 35 percent

Debt ratio = Total debt ÷ Total assets

35 percent = $65 million ÷ Total assets

Total assets = $65 million ÷ 35 percent

= $185,714,286

Wave Runnerz's ROE for 2018:

= Net income ÷ Equity

= $10,000,000 ÷ (Total assets - Debt)

= $10,000,000 ÷ ($185,714,286 - $65,000,000)

= $10,000,000 ÷ $120,714,286

= 0.0828 or 8.28%