Question

Martinez, Inc., has a total debt ratio of .65, total debt of $345,000, and net income of $31,280. Required: What is the company’s return on equity? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Answer 1

Total Equity ratio

1.00= Total Debt ratio + Total Equity ratio

1.00= 0.65 + Total Equity ratio

Total Equity ratio = 1 – 0.65

Total Equity ratio = 0.35

Total assets

Total debt = Total assets x Debt ratio

$345,000 = Total assets x 0.65

Total assets = $345,000 / 0.65

Total assets = $530,769.23

Total Equity

Total Equity = Total assets x Equity ratio

= $530,769.23 x 0.35

= $185,769.23

The Company’s return on equity (ROE)

The Company’s return on equity (ROE) = [Net Income / Total Equity] x 100

= [$1,280 / $185,769.23] x 100

= 16.84%

“Hence, the Company’s return on equity (ROE) will be 16.84%”