A firm has a debt to equity ratio of 50%,debt of $300,000,and net income of $90,000.The return on equity is:

Question

Quizplus · Accepted Answer

The equity of the firm can be calculated as follows: 
Equity = Total Assets - Total Debt
Since the debt to equity ratio is 50%, it means that the total assets are twice the size of the total debt. Therefore, 
Total Assets = 2 x Total Debt = 2 x $300,000 = $600,000
The return on equity can be calculated as follows: 
Return on Equity = Net Income / Equity
= $90,000 / ($600,000 / 2)
= $90,000 / $300,000
= 0.3 or 30% 
Therefore, the correct answer is B.

A Firm Has a Debt to Equity Ratio of 50%,debt