A firm has ROA of 14% and a debt/equity ratio of 0.8. The ffirms ROE is?
To determine the firm's Return on Equity (ROE), we need to consider the components that make up the formula for ROE. ROE is calculated by multiplying the Return on Assets (ROA) by the Equity Multiplier.
The formula for ROE is:
ROE = ROA * Equity Multiplier
1. First, let's calculate the Equity Multiplier. The equity multiplier is found by dividing the firm's total assets by its total equity.
Equity Multiplier = Total Assets ÷ Total Equity
2. The debt/equity ratio can be used to calculate the equity multiplier. The debt/equity ratio is calculated by dividing the firm's total debt by its total equity.
Debt/Equity Ratio = Total Debt ÷ Total Equity
In this case, the debt/equity ratio is given as 0.8.
3. To solve for the Equity Multiplier, we can use the formula:
Equity Multiplier = 1 + Debt/Equity Ratio
Equity Multiplier = 1 + 0.8
Equity Multiplier = 1.8
4. Now, we have the information needed to calculate ROE. We know the ROA is given as 14% and the Equity Multiplier is 1.8.
ROE = ROA * Equity Multiplier
ROE = 14% * 1.8
ROE = 0.14 * 1.8
ROE = 0.252
Therefore, the firm's ROE is 25.2%.