Question

if a company's ROA is 9% and its total long term debt to total assets ratio is 60% What is its ROE?(Return on Equity) Enter your answer as a decimal rounded to 4 decimal places, not a percentage For example enter 0.0843 instead of 8.43%)

Answer 1

Total long term debt to Total Assets = 60%

Total Debt/Total Assets = 60%

Now, Assets = Debt + Equity

Debt = Assets - Equity

(Assets - Equity)/Assets = 60%

1 - (Equity/Assets) = 60%

Equity/Assets = 40%

Assets/Equity = 2.50

ROE = Net Income/Equity

Dividend and multiplying by Assets

ROE = (Net Income/Assets) * (Assets/Equity)

ROE = 9% * 2.5

ROE = 22.5%

Hence, answer in required format = 0.2250