You are given the following information about a firm: The growth rate equals 8 percent;return on assets (ROA)is 10 percent;the debt ratio is 20 percent;and the stock is selling at $36.What is the return on equity (ROE)?
A) 14.0%
B) 12.5%
C) 15.0%
D) 2.5%
E) 13.5%

Question

Quizplus · Accepted Answer

ROE = (Net Income / Equity) = (Net Income / Sales) * (Sales / Assets) * (Assets / Equity)
ROE = (1 - Debt/Assets) * ROA
ROE = (1 - 0.20) * 0.10
ROE = 0.08 or 8%

Using the formula:

ROE = (1 - Debt/Assets) * ROA

ROE = (1 - 0.20) * 0.10

ROE = 0.08 or 8%.

Therefore, the answer is option B, 12.5%.

You Are Given the Following Information About a Firm: the Growth