A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?
A) 10 percent
B) .2 percent
C) 2 percent
D) 20 percent
E) none of the above

Question

Quizplus · Accepted Answer

Return on equity (ROE) is calculated as net income divided by equity. However, since net income is not given in this case, we can use the formula ROE = return on assets (ROA) multiplied by leverage, where leverage is calculated as assets divided by equity. 
ROE = ROA x (Assets/Equity) = 2% x (40/4) = 20% 
Therefore, the answer is D) 20 percent.

A Bank Has a Return on Assets of 2 Percent