A firm has a debt-total asset ratio of 61 percent and a return on total assets of 11.4 percent. What is the return on equity?

a. 26.27 percent

b. 29.23 percent

c. 18.48 percent

d. 10.95 percent

e. 13.50 percent

Option (b) is correct.

Explanation:

Given that,

Debt-total asset ratio = 61 percent

Return on total assets = 11.4 percent

ROE = Net profit margin * Assets turnover * Equity multiplier

⇒ Net profit margin * Assets turnover = 11.4%

Debt total assets ratio = 61%

Since debt total asset ratio is 61% that reflects the debt is 61 and the total asset is 100% so the equity is

= 100% - 61%

= 39%

Therefore, Equity total assets ratio = 39%

Equity multiplier = Total assets : Equity

= 100 : 39

Hence,

ROE = ROA * Equity multiplier

= 11.4% * (100 : 39)

= 29.23%