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?

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%