A firm has a debt to asset ratio of 60%, $300,000 in debt, and net income of $50,000. Calculate return on equity.

Question

Quizplus · Accepted Answer

To calculate return on equity, we need to first find out the total assets. As debt to asset ratio is 60%, it means that the equity portion of assets is 40% ($300,000 debt / 0.6 = $500,000 total assets). 
Return on equity = net income / equity = $50,000 / ($500,000 x 0.4) = 0.25 or 25%. Thus, the correct answer is C.

A Firm Has a Debt to Asset Ratio of 60