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A firm reports the following: Net income 667,000 ROE 9.7% debt eq ratio .68 What is...

A firm reports the following:

Net income 667,000

ROE 9.7%

debt eq ratio .68

What is the firms Return on assets

15.78

6.06

5.52

5.77

16.3

Solutions

Expert Solution

Step 1 - Compute Equity

It is given that net income = $667,000 and Return on equity (ROE) = 9.7%

ROE = Net income / Equity

0.097 = 667,000 / Equity

0.097 * Equity = 667,000

Equity = 667,000 / 0.097

Equity = 6,876,288.6597

Step 2 - Compute Debt

In the question it is given that, debt to equity ratio = 0.68

Debt to equity ratio = Total debt / Total equity

0.68 = Total debt / 6,876,288.6597

0.68 * 6,876,288.6597 = Total debt

Total debt = 4,675,876.289

Step 3 - Compute Total Assets

In the last steps you got total debt and total equity. In the balance sheet the total assets always equals the total liabilities and equity.

Total assets = Total liablities and equity

= 4,675,876.289 + 6,876,288.6597

= 11,552,164.95

Step 4 - Compute Return on Assets (ROA)

ROA = Net Income / Total Assets

= 667,000 / 11,552,164.95

= 0.057738 ie, 5.77%

Therefore Return on assets is 5.77%

jeff jeffy answered 2 years ago

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