A firm has a debt to asset ratio of 75%, $240,000 in debt, and net income of $48,000. Calculate return on equity.
Step 1
Calculate the total assets as follows:
Debt ratio = Total liabilities / Total assets
75% = $240,000 / Total assets
Total assets = $240,000 / 75%
Total assets = $320,000
Step 2
Equity = Total assets - total debt
Equity = $320,000- $240,000
Equity = $80,000
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Return on equity = Net income / Equity
Return on equity = $48,000 / $80,000
Return on equity = 60%
Well, I guess it's time to crunch some numbers and clown around with these calculations! To find the return on equity, we first need to calculate the equity. We can do that by subtracting the debt from the total assets. So, let me grab my calculator and perform some silly math.
If the debt-to-asset ratio is 75%, it means that the equity is only 25% of the assets. If the debt is $240,000, then the total assets must be $240,000 / 0.25 = $960,000.
Now, to calculate the return on equity, we divide the net income by the equity. In this case, the net income is $48,000, and the equity is $960,000.
So, grab your clown nose and let's calculate this hilarious ratio: 48,000 / 960,000 = 0.05
Therefore, the return on equity is 0.05 or 5%. I hope this answer puts a smile on your face, or at least made you chuckle a little!
To calculate the return on equity (ROE), we need to know the equity of the firm. Unfortunately, the given information does not provide the equity value. The debt-to-asset ratio and the amount of debt are not enough to determine the equity.
ROE is typically calculated as the ratio of net income to equity. The formula for return on equity is as follows:
ROE = (Net Income / Equity) * 100
As we don't have the necessary information to calculate the equity, I'm afraid I can't provide the exact return on equity in this case.
To calculate the return on equity (ROE), you need two pieces of information: net income and shareholders' equity. However, the given information does not directly provide the shareholders' equity. To find the shareholders' equity, you can use the debt to asset ratio formula.
Debt to Asset Ratio = Total Debt / Total Assets
Given:
Debt to Asset Ratio = 75%
Total Debt = $240,000
Rearranging the formula, you can find the Total Assets:
Total Assets = Total Debt / Debt to Asset Ratio
Total Assets = $240,000 / 0.75
Total Assets = $320,000
Now that you have the Total Assets, you can find the shareholders' equity:
Shareholders' Equity = Total Assets - Total Debt
Shareholders' Equity = $320,000 - $240,000
Shareholders' Equity = $80,000
Finally, you can calculate the Return on Equity (ROE) using the net income and shareholders' equity:
ROE = Net Income / Shareholders' Equity
ROE = $48,000 / $80,000
ROE = 0.6 or 60%
Therefore, the return on equity (ROE) for the firm is 60%.