A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?
A) 26.27 percent
B) 29.23 percent
C) 18.48 percent
D) 10.95 percent
E) 13.50 percent

Question

Quizplus · Accepted Answer

To calculate the return on equity (ROE), we need to use the DuPont model:

ROE = (Net Income/Total Equity)
ROE = (Net Income/Total Assets) x (Total Assets/Total Equity)
ROE = Return on Total Assets x (1 - Debt/Total Assets)

From the given information, we can calculate:

ROE = 11.4% x (1 - 0.61) = 4.446%
ROE = 4.446% x (1/0.39) = 11.385%

Therefore, the ROE for the firm is 11.385%, which is closest to choice (B) 29.23%.

A Firm Has a Debt-Total Asset Ratio of 61 Percent