Question

What is the return on equity for a firm with 15% return on assets, 10% return on debt, and a .75 debt/equity ratio?

Answer 1

The return on equity for  the firm is 18.75%.

Return on equity

Return on equity=Return on assets +[ (Debt/Equity ratio)×(Return on assets-Return on debt)]

Let plug in the formula

Return on equity=.15+ [(.75)× (.15-.10)]

Return on assets=.15+ (.75×0.05)

Return on assets=.15+0.0375

Return on equity=0.1875×100

Return on equity=18.75%

Therefore the return on equity ratio is 18.75%.

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