Gates Appliances has a return-on-assets (investment) ratio of 22 percent. a. If the debt-to-total-assets ratio...

Gates Appliances has a return-on-assets (investment) ratio of 22 percent.

a. If the debt-to-total-assets ratio is 50 percent, what is the return on equity?

Expert Solution

a.

Debt + Equity = Total Assets (TA)

TA would be always 100%.

Since debt to TA is 50%, the calculation of Equity is as below:

50% + Equity = 100%

Equity = 100% - 50%

= 50%

Again given,

Return on assets (ROA) = 22%

(Return/TA) × 100 = 22%

(Return / 100) × 100 = 22%

Return = 22%

Therefore,

Return on Equity = (22% / 50%) × 100

= (22 / 50) × 100

= 2200 / 50

= 44% (Answer)

jeff jeffy answered 2 years ago

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