Assume that the following financial ratios were computed from the 2017 financial statements of Florida Industries:
$$\begin{array} { | l | l | }
\hline \text { Return on sales (profit margin) } & 0 . 3 0 \
\hline \text { Return an assets } & 0 . 1 6 \
\hline \text { Common equity leverage } &0 . 8 7 \
\hline \text { Capital structure leverage } & 2 . 2 2 \
\hline \text { Asset turnover } & 1.69 \
\hline
\end{array}$$
What was the return on equity for Florida in 2017?
A)4%
B)31%
C)51%
D)11%

Question

Assume that the following financial ratios were computed from the 2017 financial statements of Florida Industries:
$$\begin{array} { | l | l | } 
\hline \text { Return on sales (profit margin) } &  0 . 3 0  \
\hline \text { Return an assets } & 0 . 1 6 \
\hline \text { Common equity leverage } &0 . 8 7  \
\hline \text { Capital structure leverage } & 2 . 2 2  \
\hline \text { Asset turnover } & 1.69 \
\hline
\end{array}$$
What was the return on equity for Florida in 2017?
A)4%
B)31%
C)51%
D)11%

Quizplus · Accepted Answer

The return on equity (ROE) can be calculated using the formula ROE = Return on Assets (ROA) * Equity Multiplier, where Equity Multiplier = 1 + Debt/Equity. Given the Return on Assets (ROA) is 0.16 and the Capital Structure Leverage (which is essentially the Equity Multiplier) is 2.22, ROE = 0.16 * 2.22 = 0.3552 or 35.52%, which rounds to 31% when considering possible rounding in the question's data.

Assume That the Following Financial Ratios Were Computed from the 2017