Question

During the latest year, Sky Inc. had total sales of $500,000, net income of 30,000, and its year-end total assets were $250,000. The firm’s total debt to total assets ratio was 0.36. You can assume total debt is the same as total liabilities. What is firm's return on equity (ROE)?

Answer 1

18.75%

Step-by-step explanation:

Data provided in the question:

Total sales = $500,000

Net income = $30,000

Total assets = $250,000

Debt to total assets ratio = 0.36

Thus,

Total debt = 0.36 × $250,000

= $90,000

Shareholders equity = Total assets - Total debt

= $250,000 - $90,000

= $160,000

Now,

Return on equity = Net income ÷ Shareholders Equity

= [ $30,000 ÷ $160,000] × 100%

= 18.75%