Question

Roy Corp has a net income of $250,000. Roy Corp’s days sales outstanding figure is 15. Total Assets are $750,000, total account receivables are $95,000 and the debt-to-equity ratio is 0.90. What is Roy Corp’s ROE?

Answer 1

Debt / Equity Ratio = Total Debt/ Total Equity

0.90 = Total Debt / Total Equity

or 0.90 Total Equity = Total Debt

Let Total Equity be x

Hence, Total Debt = 0.90 x

Total Assets= Total Debt +Total  Equity ( This is because Total Liabilities is always equal to Total Assets)

$ 750,000 = x+0.90 x

$ 750,000 = 1.90 x

or x = $ 750,000 / 1.90

= $ 394,736.8421

Hence, Equity = $ 394,736.8421

Return On Equity = Net Income / Equity

= $ 250,000 / $ 394,736.8421

= 0.6333

Hence the correct answer is 0.63