A firm has a debt to equity ratio of 40%, debt of $250,000, and net income of $100,000. The return on equity is

Name: A firm has a debt to equity ratio of 40%, debt of $250,000, and net income of $100,000. The return on equity is
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Question

Quizplus · Accepted Answer

Debt to equity ratio = Debt/Equity = 40%/60% = 0.67
Equity = Debt/0.67 = $250,000/0.67 = $373,134

Return on equity = Net Income/Equity
= $100,000/$373,134
= 0.2678 or 26.78%

Therefore, the closest answer is B) 16%.

A Firm Has a Debt to Equity Ratio of 40