In: Finance
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
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%