Question

1. Using the following data for Golman Sachs (2019), the return on assets (ROA) is

Net income: $8,466

Total Assets: $992,968

Total Liabilities: $900,990

a) .0047

b) .092

c) .0085

d) .0112

2. the return on equity (ROE) is

a) 0.0092

b) 0.092

c) 0.0112

d) 0.0085

3. the equity multiplier (EM) is

a) 9.78

b) 10.8

c) 12.2

d) 8.3

Answer 1

1. Return on Assets is calculated using the following formula:

ROA = Net Income / Average total assets

Average total assets are usually the average assets held by the company over the period for which we are interested to calculate ROA.

In our case, Total assets = $992,968 and Net income = $8,466

ROA = (8466 / 992,968) = 0.0085

Option C is the correct answer.

2. Return on equity is given by the following formula:

Return on equity = Net Income / Shareholder's equity

Note that Total Assets for a company = Total liabilities + Shareholder's equity

or Shareholder's equity = Total Assets - Total liabilities

In our case, Shareholder's equity = $992,968 - $900,990 = $91,978

Return on equity = Income / Shareholder's equity = $8,466 / $91,978 = 0.092

Option B is the correct answer.

3. Equity multiplier is given by the following formula:

Equity multiplier = Total Assets / Total Shareholder's equity

Equity multiplier = ($992,968 / $91,978) = 10.8

Thus, Option B is the correct answer.