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?
The correct answer is: a)
Step 1: Determine the book value of equity
Since D/E = .42/1
Then A =
|D + E|
|.42 + 1|
Therefore, Equity equals (1/1.42) of assets or (1/1.42)(1.8M) = 1,267,606
ROE = 200,000/1,267,606 = 15.8%
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