XYZ Corp. has a debt to equity ratio of 42%. If net income is $200,000 ...

By Investopedia Staff AAA
Q:

XYZ Corp. has a debt to equity ratio of 42%. If net income is $200,000 and assets are reported as $1.8 million, what is the ROE?
a) 15.8%
b) 9.8%
c) 17.4%
d) 11.7%

A:

The correct answer is: a)
Step 1: Determine the book value of equity
Since D/E = .42/1

Then A =
  D + E
=
  .42 + 1
=
  1.42

Therefore, Equity equals (1/1.42) of assets or (1/1.42)(1.8M) = 1,267,606

Therefore; ROE = 200,000/1,267,606 = 15.8%


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