Asked by Mihai Baco?-Cosma on Jun 01, 2024
Verified
A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is ________.
A) 15.12%
B) 28.42%
C) 37.24%
D) 40.6%
ROA
Return on Assets, a financial ratio that indicates how profitable a company is relative to its total assets.
Debt/Equity Ratio
A financial ratio indicating the relative proportion of shareholder's equity and debt used to finance a company's assets.
Tax Rate
The percentage at which an individual or corporation is taxed, which can vary based on income level or profits.
- Examine the effects of financial and operational leverage on a company's return on equity (ROE).
Verified Answer
ZK
Zybrea KnightJun 06, 2024
Final Answer :
B
Explanation :
ROE = (1 - 0.30) [0.19 + 1.8 (0.19 - 0.07)] = 0.2842
Learning Objectives
- Examine the effects of financial and operational leverage on a company's return on equity (ROE).