A fire has destroyed a large percentage of the financial records of the Carter Company.You have the task of piecing together information in order to release a financial report.You have found the return on equity to be 18 percent.If sales were $4 million,the debt ratio was 0.40,and total liabilities were $2 million,what was the return on assets (ROA)?
A) 10.8%
B) 0.8%
C) 1.25%
D) 12.6%
E) Insufficient information.

Question

Quizplus · Accepted Answer

ROA = Net Income / Total Assets. Given the debt ratio (total liabilities/total assets) is 0.40, and total liabilities are $2 million, total assets = $2 million / 0.40 = $5 million. With an 18% return on equity (ROE = Net Income / Shareholders' Equity) and knowing that Shareholders' Equity = Total Assets - Total Liabilities = $5 million - $2 million = $3 million, we find Net Income = 18% of $3 million = $0.54 million. Therefore, ROA = $0.54 million / $5 million = 10.8%.

A Fire Has Destroyed a Large Percentage of the Financial