Question

Return on equity can be calculated as ROA × Equity multiplier. What is another way to express this equation?

a)ROE = ROA × (1 + Debt − Equity Ratio)

b)ROE = ROA × Profit Margin

c)ROE = ROA × Total asset Turnover

d)ROE = ROA × (1 − Equity multiplier)

e) ROE = ROA × Operating efficiency

Answer 1

Ans. Option a

Explanation :

ROE = ROA * Equity multiplier

Equity multiplier = Total assets / Total equity

* Total assets = total debt + total equity

Debt equity ratio = Total debt / Total equity

So the equity multiplier = (1+ debt equity ratio)

So the ROE = ROA * (1 + debt - equity ratio)