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Firm A has a debt to total asset ratios of 41 percent and returns on total assets of 8 percent
Firm A has a debt to total asset ratios of 41 percent and returns on total assets of 8 percent. What is the return on equity for Firm A?
Expert Solution
Computation of the return on equity (ROE) for firm A:-
Equity to total assets ratio = 1 - Debt to total assets ratio
= 1 - 41%
= 59%
Equity / Total assets = 59%
Equity = 59% * Total assets
ROA = Net income / Total assets
8% = Net income / Total assets
Net income = 8% * Total assets
ROE = Net income / Total equity
= 8% * Total assets / (59% * Total assets)
= 13.56%
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