The Meryl Corporation's common stock currently is selling at $100 per share,which represents a P/E ratio of 10.If the firm has 100 shares of common stock outstanding,a return on equity of 20 percent,and a debt ratio of 60 percent,what is its return on total assets (ROA)?
A) 8.0%
B) 10.0%
C) 12.0%
D) 16.7%
E) 20.0%

Question

Quizplus · Accepted Answer

The return on total assets (ROA) can be calculated using the formula ROA = Net Income / Total Assets. Given the P/E ratio of 10 and stock price of $100, the earnings per share (EPS) is $10. With 100 shares, net income is $1,000. The equity is $5,000 (since ROE is 20%, and net income is $1,000, equity = $1,000 / 0.20). With a debt ratio of 60%, total assets are $12,500 (equity is 40% of total assets). Thus, ROA = $1,000 / $12,500 = 8.0%.

The Meryl Corporation's Common Stock Currently Is Selling at $100