A firm has a debt to equity ratio of 50%, debt of $300,000, and net income of $90,000. The return on equity is
a. 60%
b. 15%
c. 30%
d. not enough information
To calculate the return on equity (ROE), we need to know both the net income and the equity of the firm. However, we are only given the debt and the debt to equity ratio.
First, we can calculate the equity of the firm using the debt to equity ratio. The debt to equity ratio is the ratio of total debt to total equity.
Debt to Equity Ratio = Total Debt / Total Equity
Given that the debt to equity ratio is 50% and the debt is $300,000, we can calculate the equity as follows:
Equity = Debt / (Debt to Equity Ratio)
Equity = $300,000 / (0.50)
Equity = $600,000
Now that we know the equity, we can calculate the return on equity (ROE) using the net income.
ROE = (Net Income / Equity) * 100
Given that the net income is $90,000 and the equity is $600,000, we can calculate the ROE as follows:
ROE = ($90,000 / $600,000) * 100
ROE = 0.15 * 100
ROE = 15%
Therefore, the correct answer is option b) 15%.