Question

Fama's French Bakery has a return on assets (ROA) of 10% and a return on equity (ROE) of 14%. Fama's total assets equal total debt plus common equity (that is, there is no preferred stock). Furthermore, we know that the firm's total assets turnover is 5. What is Fama's debt ratio? a. 71.43% b. 55.56% c. 28.00% d. 14.29% e. 28.57%

Answer 1

e. 28.57%

Step-by-step explanation:

As we know that

Return on assets = (Net income) ÷ (average of total assets)

Return on Equity = Net income ÷ Equity

Total asset turnover = (Sales ÷ Total assets)

Plus the DuPont analysis formula is

ROE = Profit margin × Total assets turnover × Equity multiplier

where,

Equity multiplier = Total assets ÷ Equity = ROE ÷ ROA = 1.4

Now the profit margin is

14% = Profit margin × 5 × 1.4

So, the profit margin is 2%

And, the debt ratio is

= Debt ÷ Total assets

So can we write

(Total assets - equity) ÷ (Total assets) = 1

So,

= 1 - equity ÷ total assets

= 1 - 1 ÷ 1.4

= 0.2857