DJ's Soda Fountain has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $20 million, total debt = $3 million, debt ratio = 75 percent, ROE = 27 percent. Using this information, what is DJ's ROA?
A) .0675 percent
B) 6.75 percent
C) 25.00 percent
D) 27.00 percent

Question

Quizplus · Accepted Answer

The debt ratio is given as 75%, which means that debt represents 75% of the total assets. Therefore, if total debt is $3 million, the total assets would be $3 million / 0.75 = $4 million. Return on Equity (ROE) is given as 27%, and ROE = Net Income / Equity. Since the debt ratio is 75%, the equity ratio is 25% (100% - 75%), making equity $1 million ($4 million total assets * 25%). With an ROE of 27%, the net income is $270,000 ($1 million * 27%). Return on Assets (ROA) is calculated as Net Income / Total Assets, which would be $270,000 / $4 million = 6.75%.

DJ's Soda Fountain Has Asked You to Help Piece Together