A firm with a debt equity ratio of 1/3, return on assets of 15%, and return on debt of 10% will have return on equity of:
A)15.00%.
B)16.67%.
C)20.00%.
D)21.17%.

Question

Quizplus · Accepted Answer

The return on equity (ROE) can be calculated using the formula ROE = ROA + (ROA - RD) * (D/E), where ROA is the return on assets, RD is the return on debt, and D/E is the debt-to-equity ratio. Plugging in the given values: ROE = 0.15 + (0.15 - 0.10) * (1/3) = 0.15 + 0.01667 = 0.1667 or 16.67%.

A Firm with a Debt Equity Ratio of 1/3, Return