Stephen's Auto Body Shop (Oshawa) has a debt-equity ratio of .6, a total asset turnover of 1.43, and a proﬁt margin of 5 %. The ﬁrm has a return on assets of _____ % and a return on equity of _____
%)
A) 7.15; 4.29
B) 7.15; 11.44
C) 8.58; 4.29
D) 8.58; 7.15
E) 11.44; 7.15

Question

Quizplus · Accepted Answer

Return on assets (ROA) = Profit margin × Total asset turnover
ROA = 0.05 × 1.43
ROA = 0.0715 or 7.15%

Return on equity (ROE) = ROA × Debt-equity ratio + (Debt-equity ratio × (1 - Profit margin))
ROE = 0.0715 × 0.6 + (0.6 × (1 - 0.05))
ROE = 0.429 or 11.44%

Therefore, the answer is B.

Stephen's Auto Body Shop (Oshawa) Has a Debt-Equity Ratio of .6