Question

A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.

Answer 1

26.6%

Answer 2

Step 1
Calculate the total assets as follows:

Debt ratio = Total liabilities / Total assets

75% = $240,000 / Total assets

Total assets = $240,000 / 75%

Total assets = $320,000


Step 2
Equity = Total assets - total debt

Equity = $320,000- $240,000

Equity = $80,000

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Return on equity = Net income / Equity

Return on equity = $48,000 / $80,000

Return on equity = 60%