Question

Suppose the expected returns on equity of two firms, Macrosoft and Microsoft, that operate in the same business are 10.50% and 13.00%, respectively. What is the return on assets in this business if Macrosoft has no debt?

Answer 1

The return on assets in this business for Macrosoft is

ROA = 10.50%

Explanation:

Return on Equity:

ROE represents how much a firm is generating profits by using the shareholder's money.

ROE is calculated as

`$ {ROE = (Annual \:\: net\: \: income)/(Average \:\: shareholder's \:\: equity) $`​ ​

Return on Assets:

ROA represents how much a firm is generating profits for every dollar of its assets.

ROA is calculated as

`$ {ROA = (Annual \:\: net\: \: income)/(Total \:\: assests) $`​ ​ ​

What is the return on assets in this business if Macrosoft has no debt?

Debt plays an important role in the calculations of return on assets.

We know that

Assets = Liabilities + Equity

Since the Macrosoft has no debt, its return on assets will be same as return on equity.

Assets = Equity

ROA = ROE

ROA = 10.50%