PJ's Ice Cream Parlor has asked you to help piece together financial information on the firm for the most current year. Managers give you the following information: sales = $50 million, total debt = $20 million, debt ratio = 50 percent, and ROE = 12 percent. Using this information, what is PJ's ROA?
A)4 percent
B)6 percent
C)10 percent
D)12 percent

Question

Quizplus · Accepted Answer

ROE (return on equity) = Net Income/Equity
And, Equity = Total Assets - Total Debt
Given, ROE = 12% and Total Debt = $20 million
Therefore, Equity = Total Assets - 20
Also, Debt Ratio = Total Debt/Total Assets = 50%
So, Total Assets = Total Debt/0.5 = $40 million
Now, we can calculate Net Income: ROE = Net Income/Equity
0.12 = Net Income/(40 - 20)
0.12 = Net Income/20
Net Income = $2.4 million
Finally, we can calculate ROA (return on assets): 
ROA = Net Income/Total Assets 
ROA = $2.4 million/$40 million = 0.06 or 6%

PJ's Ice Cream Parlor Has Asked You to Help Piece