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%


RELATED FAQS

  1. What level of return on equity is common for a company in the banking sector?

    Discover what the average return on equity (ROE) ratio is for companies in the banking industry, and understand the significance ...
  2. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ...
  3. A brokerage customer has $10,000 in securities and a credit balance of $4,000 ... ...

    The correct answer is d The market value of the person's equity is equal to the market value of the securities plus the credit ...
  4. Are companies with a negative return on equity (ROE) always a bad investment?

    Any metric that uses net income is basically nullified as an input when a company reports negative profits. Return on equity ...
  5. What is the average return on equity for a company in the financial services sector?

    Learn the importance of calculating a company's return on equity and what businesses in the financial services industry average ...
  6. Why are coupon payments considered an annuity?

    Learn about the average debt to equity (D/E) ratio for firms in the electronics sector and what the median D/E ratio is and ...
RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company ...
  3. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont ...
  5. Capital Structure

    A mix of a company's long-term debt, specific short-term debt, ...
  6. Equity

    Equity is the value of an asset less the value of all liabilities ...
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center