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Firm A and Firm B have debt-total asset ratios of 65 percent and 45 percent, respectively, and returns on total assets of 5 percent and 9 percent, respectively. What is the return on equity for Firm A and Firm B?

Respuesta :

Answer:

Firm A = 14.29%

Firm B = 16.36%

Explanation:

Firm A:

Debt-total asset ratio = 65 percent

                                   = 0.65

Therefore,

Equity-total asset ratio = 1 - 0.65

                                     = 0.35

Returns on total assets = (Net Income ÷ Total assets) × 100

                                       = 5 percent

                                       = 0.05

Return on Equity:

= (Net Income ÷ Equity) × 100

= (0.05 ÷ 0.35) × 100

= 0.1429 × 100

= 14.29%

Firm B:

Debt-total asset ratio = 45 percent

                                   = 0.45

Therefore,

Equity-total asset ratio = 1 - 0.45

                                     = 0.55

Returns on total assets = (Net Income ÷ Total assets) × 100

                                       = 9 percent

                                       = 0.09

Return on Equity:

= (Net Income ÷ Equity) × 100

= (0.09 ÷ 0.55) × 100

= 0.1636 × 100

= 16.36%

       

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