Asked by ashlee clowers on May 02, 2024
Verified
Suppose a firm has a debt-to-equity ratio (D/E) of 0.5,return on assets of 18%,and return on debt of 12%.What will be its return on equity?
A) 15.00%
B) 16.67%
C) 20.00%
D) 21.17%
Debt-to-Equity Ratio
A financial metric indicating the relative proportion of shareholders' equity and debt used to finance a company's assets.
Return on Equity
A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.
Return on Assets
A financial ratio that measures how efficiently a company uses its assets to generate net income, typically expressed as net income divided by total assets.
- Understand and calculate the return on equity using the debt-to-equity ratio, return on assets, and return on debt.
Verified Answer
TR
Trinity RennerMay 07, 2024
Final Answer :
C
Explanation :
The return on equity (ROE) can be calculated using the formula ROE = ROA + (ROA - RD) * (D/E), where ROA is the return on assets, RD is the return on debt, and D/E is the debt-to-equity ratio. Plugging in the given values: ROE = 0.18 + (0.18 - 0.12) * 0.5 = 0.18 + 0.03 = 0.21 or 21%.
Learning Objectives
- Understand and calculate the return on equity using the debt-to-equity ratio, return on assets, and return on debt.