Computation of Return on Equity:

Debt-Total Assets Ratio = Debt/Total Assets

For Firm A:

Debt = 0.42 * Total Assets

Total Assets = Debt+Equity

Total Equity = 0.58 * Total Assets

Return on Assets (ROA) = Net Income/Total Assets

Hence,

Net Income = 0.07*Total assets

Return on Equity (ROE) = Net Income/Total Equity

=0.07*Total Assets/ 0.58*Total Assets

Return on Equity (ROE) = 12.07%

 

 

For Firm B:

Debt = 0.32 * Total Assets

Total Assets = Debt+Equity

Total Equity = 0.68 * Total Assets

Return on Assets (ROA) = Net Income/Total Assets

Hence,

Net Income = 0.12*Total assets

Return on Equity (ROE) = Net Income/Total Equity

=0.12*Total Assets/ 0.68*Total Assets

Return on Equity (ROE) = 17.65%