A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.
2 answers
26.6%
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%
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
-----------------------------------
Return on equity = Net income / Equity
Return on equity = $48,000 / $80,000
Return on equity = 60%
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