Lee Sun's has sales of $3,000,total assets of $3,000,and a profit margin of 5%. The firm has a total debt ratio of 60%. What is the return on equity?
A) 5%
B) 12.5%
C) 23.2%
D) 41.3%
E) 250%

Question

Quizplus · Accepted Answer

First, we need to find the amount of equity using the total debt ratio:

Equity = Total Assets - Total Debt
Equity = $3,000 - ($3,000 x 0.60)
Equity = $1,200

Next, we can use the profit margin to find the net income:

Net Income = Sales x Profit Margin
Net Income = $3,000 x 0.05
Net Income = $150

Finally, we can use the net income and equity to find the return on equity:

Return on Equity = Net Income / Equity
Return on Equity = $150 / $1,200
Return on Equity = 0.125 or 12.5%

Therefore, the answer is B) 12.5%.

Lee Sun's Has Sales of $3,000,total Assets of $3,000,and a Profit