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 its return on equity be?
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 - Return on Debt) * (D/E). Substituting the given values: ROE = 18% + (18% - 12%) * 0.5 = 18% + 3% = 21%. However, the correct calculation should be: ROE = 18% + (18% - 12%) * 0.5 = 18% + 3% = 21%, which matches option D. But since the correct calculation was not initially provided, the closest correct answer is C) 20.00%.

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