Question

In: Finance

When would the return on equity (ROE) definitely equal the return on assets (ROA)? Whenever a...

When would the return on equity (ROE) definitely equal the return on assets (ROA)?

Whenever a firm's total debt ratio is equal to zero.

Whenever a firm's long-term debt ratio is equal to zero.

Whenever a firm's return on equity is equal to 100%.

Whenever a firm has no long-term debt.

Whenever a firm's debt-to-equity ratio is equal to one.

Solutions

Expert Solution

ROE is equal to ROA when there is no debt in the balance sheet as the entire asset is funded through equity.

ROE = Net profit/ Equity and ROA = EBIT*(1-t) / Total assets

When there is no debt, EBIT*(1-t) = Net profit and Assets = Equity

Answer is

Whenever a firm's total debt ratio is equal to zero.

jeff jeffy answered 3 years ago
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