A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what was the return on assets (ROA)?
A) 10.80%
B) 0.80%
C) 1.25%
D) 12.60%
E) Insufficient information.

Question

Quizplus · Accepted Answer

Return on Assets (ROA) is calculated as Net Income divided by Total Assets. Given that the Return on Equity (ROE) is 18%, and the debt ratio is 0.40, we can find the equity by using the formula: Equity = Total Assets - Total Liabilities. Since Total Liabilities are $2 million and the debt ratio is 0.40, Total Assets = Total Liabilities / Debt Ratio = $2 million / 0.40 = $5 million. The equity is then $5 million - $2 million = $3 million. ROE = Net Income / Equity, so Net Income = ROE * Equity = 0.18 * $3 million = $0.54 million. Finally, ROA = Net Income / Total Assets = $0.54 million / $5 million = 0.108 or 10.80%.

A Fire Has Destroyed a Large Percentage of the Financial