Question

Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68 percent. The firm has a total debt ratio of 78 percent. What is the return on equity

Answer 1

32.14%

Explanation:

Assets = Equity + Liabilities.

If the firm has a debt ratio of 78%, then it must have an equity ratio of 22%

The return on equity is given by:

`ROE = (Revenue* Margin)/(Equity)`

For a margin of 9.68%, revenues of $807,200, and total equity of 22% x $1,105,100:

`ROE = (\$807,200*0.0968)/(\$1,105,100*0.22)\\ ROE =0.3214= 32.14\%`

Reliable Cars has a return on equity of 32.14%.