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I'm in an accounting class right now, and I'm having the hardest time with a problem I was given. I hope someone here might be able to guide me in the right direction with it.

The Company has a return-on-assets (investment) ratio of 12 percent.
a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?
b. If the firm had no debt, what would the return-on-equity ratio be?

Now, I know that the return on equity = net income/average equity
The debt to total assets ratio = total liabilities/total assets
and that the return-on-assets ratio = net income/total assets

The problem is that I don't know how to use those formulas with the percentages given to figure out the values I need to us. I've read the entire chapter, and I've searched at various accounting tutorial websites online. I can not find any similar problem though.

My guess is that either you divide the 12% and the 40% or you multiply it. I don't know though. I'm not very good with percentages and ratios. There's not much to do with two numbers though - add, subtract, multiply or divide. If I was given at least one value in a monetary amount, I could probably figure it out, but that would be too easy, wouldn't it? :p I can't wait until this class is over in about 5 more weeks! lol

Thanks in advance for any help.

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JennyJen2 9 years
I am impressed! I am good at math but accounting can be sooo confusing - I don't even do my own taxes.
wynter 9 years
hehe...I'm awful at math too. This class hasn't been too fun. Thanks Jen. I'll try and work my way through it! I was busy packing for hubby and getting some sleep (I was up all night working on my homework and then MIL called so I've been looking for flights ever since). I didn't even get to fall asleep until almost 7 this morning.
LaylaCams 9 years
CRAP! I just hit Post &Subscribe! and I just wanted to post! Grrr! :mob:
LaylaCams 9 years
Hate math! Good thing Jen is here to help, even though her comment explaining the problem gave me a huge headache. lol
audreystar 9 years
they have already started geometry basics and my son is in the third grade. :oy: my hubby and i are both knuckleads at math. :rotfl:
LisaK 9 years
Glad Jen can help. Any type of math I just go blank. I made a C in college algebra. I can't even help Ethan anymore now that he has started algebra because I don't remember any of it :ROTFL: Thank goodness I am married to an engineer :P If no one had helped you I was going to get him too :)
jennifer76 9 years
:rotfl: @ knucklead. That's my new insult-du-jour. :rotfl: What a knucklead. :oy: :rotfl:
audreystar 9 years
:rotfl: at knucklead :rotfl: i also am apparently having a hard time with both math and keyboarding.
jennifer76 9 years
:rotfl: Aud! That's pretty good!! :nerdgirl:
jennifer76 9 years
Oh, I just noticed you're not online. Ok, I'm going to put some hints in my comment here, and I'll PM you the whole answer. Be a good girl and try to work it out before you check the PM. :rotfl: a.) If it helps you, you can put these into numbers. For example, if ROA is 12% then you can substitute 12 for net income and 100 for total assets. If D/TA is 40%, then you can call debt 40 and TA is still 100. Like you said, ROE is NI/SE, so you already know NI and you can figure out equity using the debt and total assets - both of which you already know. b.) Remember that equity is assets less liabilities, so if the company has no liabilities then ROE must be....what? Ok, off to PM.
audreystar 9 years
yeah and i haven't had my coffee. numbers + early morning - coffee=knucklead (that is the best math i can do this early in the morning and really ever :rotfl: )
jennifer76 9 years
Hey Aud! Nothing like accounting first thing in the morning. :rotfl:
jennifer76 9 years
Ok, I've got it. Do you want me to just lay it out, or do you want me to play tutor and help you figure it out?
audreystar 9 years
i am glad jen is helping. i am a total knucklehead on stuff like this.
jennifer76 9 years
Hey, Wynter. The key to this problem is remembering that equity is assets minus liabilities. Let me pour a cup of coffee and look over the problem and I'll see if I can help more.

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