Question

A firm’s Return on Assets is 10%, its Total Asset Turnover is 2, and its Debt Ratio is 0.75. This firm’s Return on Equity is:

	a.	40%
	b.	13.33%
	c.	20%
	d.	need to know what its Basic Earning Power is

Answer 1

Asset turnover = sales/total assets = 2

Assume total asset is 1

then sales = 2*1 =2

Return on assets =net inocme/total assets = 10%

net income/1 = 10%

net income = 1*10% = 0.10

Debt ratio = 0.75

debt = total assets * debt ratio

=1*0.75

=0.25

equity = total assets - debt

=1-0.75 = 0.25

Return on equity formula = net income/equity

=0.10/0.25

=0.40 or 40%

So return on equity is 40%