Suppose a firm has a debt-to-equity ratio (D/E) of 0.5,return on assets of 18%,and return on debt of 12%.What will be its return on equity?
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 = 0.18 + (0.18 - 0.12) * 0.5 = 0.18 + 0.03 = 0.21 or 21%.

Suppose a Firm Has a Debt-To-Equity Ratio (D/E) of 0