PJ's Ice Cream Parlour has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ's ROA?
A) 4 percent
B) 6 percent
C) 10 percent
D) 12 percent

Question

Quizplus · Accepted Answer

ROA (Return on Assets) can be calculated using the formula ROA = Net Income / Total Assets. Given the debt ratio (Total Debt / Total Assets) is 50%, this means Total Assets = $40 million ($20 million / 0.5). With an ROE (Return on Equity) of 12% and knowing that Equity = Total Assets - Total Debt = $40 million - $20 million = $20 million, we can calculate Net Income = ROE * Equity = 0.12 * $20 million = $2.4 million. Therefore, ROA = $2.4 million / $40 million = 6%.

PJ's Ice Cream Parlour Has Asked You to Help Piece