Profitability Ratios DJ's Soda Fountain has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $20 million, total debt = $3 million, debt ratio = 75%, ROE = 27%. Using this information, what is DJ's ROA?
A) .0675%
B) 6.75%
C) 25.00%
D) 27.00%

Question

Quizplus · Accepted Answer

To calculate ROA, we use the formula:
ROA = Net Income / Total Assets

We don't have net income, but we can use the ROE and total debt ratio to calculate it:
ROE = Net Income / Equity = Net Income / (Assets - Debt)
27% = Net Income / (1 - 0.75) = Net Income / 0.25
Net Income = 0.25 x 0.27 = 0.0675

Now we can use the net income and total assets to calculate ROA:
ROA = 0.0675 / (20 - 3) = 0.0675 / 17 = 0.004 or 0.4%
However, the question asks for the answer as a percentage, so we multiply by 100 to get 4%.

Therefore, the correct answer is B) 6.75%.

Profitability Ratios DJ's Soda Fountain Has Asked You to Help