ROE

[bmars]

. 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%


Here is the question. Can someone please help me understand the relationship of Debt/Equity and Total Assets. I am confused.


Thanks.

 

[Super I]

Here's a hint.

Basic equation for a balance sheet: A=L+OE


You're told that A= $1.8 million

You're told that the ratio of debt to equity (L to OE) is 42%.

The rest is pure math.

 

[bmars]

Thanks so much.

 

[bigwilly]

It's easy when you think about it. Here it is:

D + E = 1,800,000

If D/E = .42, then D=0.42E

Substitute for D

0.42E + E = 1,800,000

Solve for E

1.42E = 1,800,000

E = 1,267,605.63

Plug back in to original formula to get Debt.

D + 1,267,605 = 1,800,000

D = 532,395.37

Now you can check 532,395/1,267,606 = 0.42.


Hope this helps you and others that were afraid to ask. Don't be afraid to write things out and take the time to understand each problem you get wrong or don't understand it will pay dividends in the end.