Corbin Solutions had net profit of $150 000 on sales of $5 000 000 during 2016.In addition, the firm's total assets were $2 500 000, and its capital structure is comprised of 40% debt and 60% equity.What was Corbin's return on equity in 2016?
A)15%
B)2.5%
C)10%
D)Return on equity cannot be determined with the information provided.

Question

Quizplus · Accepted Answer

To calculate the return on equity, we need to use the formula:

Return on Equity = Net Profit / Total Equity

First, we need to find the total equity, which is calculated as:

Total Equity = Total Assets - Total Debt
Total Equity = $2,500,000 - (40% × $2,500,000)
Total Equity = $2,500,000 - $1,000,000
Total Equity = $1,500,000

Now we can calculate the return on equity:

Return on Equity = $150,000 / $1,500,000
Return on Equity = 0.1 or 10%

Therefore, the answer is C, 10%.

Corbin Solutions Had Net Profit of $150 000 on Sales