The Marshall Company has determined that its return on equity is 18.5%. Management is interested in the various components that went into this calculation. You are given the following information: Sales = $12 M, Return on Assets = 7.5% and Return on Sales = 4.5%. What percentage of the company's assets are financed by equity? (Round to the nearest whole percentage)
A)24%
B)37%
C)41%
D)53%

Question

Quizplus · Accepted Answer

First, we need to use the formula for Return on Equity (ROE):

ROE = Net Income / Average Equity

We can rearrange the formula to solve for Average Equity:

Average Equity = Net Income / ROE

We are not given the values for net income, so we need to find it using the information given. We can use the formula for Return on Assets (ROA):

ROA = Net Income / Total Assets

We can rearrange the formula to solve for Net Income:

Net Income = ROA x Total Assets

Net Income = 0.075 x $12M

Net Income = $900,000

Now we can use the formula for Average Equity:

Average Equity = $900,000 / 0.185

Average Equity = $4,864,864.86

Next, we need to find the total assets of the company that are financed by equity. We can use the formula:

Equity Ratio = Equity / Total Assets

We can rearrange the formula to solve for Equity:

Equity = Equity Ratio x Total Assets

We are given the Return on Sales (ROS):

ROS = Net Income / Sales

We can rearrange the formula to solve for Net Income:

Net Income = ROS x Sales

Net Income = 0.045 x $12M

Net Income = $540,000

Now we can use the formula for Equity Ratio:

Equity Ratio = Average Equity / Total Assets

Equity Ratio = $4,864,864.86 / (Net Income / ROS)

Equity Ratio = $4,864,864.86 / ($540,000 / 0.045)

Equity Ratio = $4,864,864.86 / $12,000,000

Equity Ratio = 0.4054

Equity Ratio = 40.54%

Rounding to the nearest whole percentage gives us the answer of 41%. Therefore, the correct answer is C.

The Marshall Company Has Determined That Its Return on Equity